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<SEC-DOCUMENT>0000950117-03-001137.txt : 20030326
<SEC-HEADER>0000950117-03-001137.hdr.sgml : 20030325
<ACCEPTANCE-DATETIME>20030326172733
ACCESSION NUMBER:		0000950117-03-001137
CONFORMED SUBMISSION TYPE:	N-2
PUBLIC DOCUMENT COUNT:		3
FILED AS OF DATE:		20030326

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			COHEN & STEERS REIT & PREFERRED BALANCED INCOME FUND INC
		CENTRAL INDEX KEY:			0001224450
		STATE OF INCORPORATION:			MD

	FILING VALUES:
		FORM TYPE:		N-2
		SEC ACT:		1933 Act
		SEC FILE NUMBER:	333-104047
		FILM NUMBER:		03619046

	BUSINESS ADDRESS:	
		STREET 1:		757 THIRD AVE.
		CITY:			NEW YORK
		STATE:			NY
		ZIP:			10017

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			COHEN & STEERS REIT & PREFERRED BALANCED INCOME FUND INC
		CENTRAL INDEX KEY:			0001224450
		STATE OF INCORPORATION:			MD

	FILING VALUES:
		FORM TYPE:		N-2
		SEC ACT:		1940 Act
		SEC FILE NUMBER:	811-21326
		FILM NUMBER:		03619047

	BUSINESS ADDRESS:	
		STREET 1:		757 THIRD AVE.
		CITY:			NEW YORK
		STATE:			NY
		ZIP:			10017
</SEC-HEADER>
<DOCUMENT>
<TYPE>N-2
<SEQUENCE>1
<FILENAME>a34780.txt
<DESCRIPTION>COHEN & STEERS REIT AND PREFERRED INCOME FUND
<TEXT>


<Page>
     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 26, 2003

                                               SECURITIES ACT FILE NO. 333-
                                       INVESTMENT COMPANY ACT FILE NO. 811-
________________________________________________________________________________

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                              -------------------

                                    FORM N-2

(CHECK APPROPRIATE BOX OR BOXES)

[x] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO.
[ ] POST-EFFECTIVE AMENDMENT NO.

                                     AND/OR

[x] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[ ] AMENDMENT NO.

                              -------------------

                                 COHEN & STEERS
                          REIT AND PREFERRED BALANCED
                               INCOME FUND, INC.
               (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

                              -------------------

                                757 THIRD AVENUE
                            NEW YORK, NEW YORK 10017
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 832-3232

                                ROBERT H. STEERS
                    COHEN & STEERS CAPITAL MANAGEMENT, INC.
                                757 THIRD AVENUE
                            NEW YORK, NEW YORK 10017
                                 (212) 832-3232
                    (NAME AND ADDRESS OF AGENT FOR SERVICE)

                              -------------------

                                WITH COPIES TO:

                              SARAH E. COGAN, ESQ.
                           SIMPSON THACHER & BARTLETT
                              425 LEXINGTON AVENUE
                            NEW YORK, NEW YORK 10017
                                 (212) 455-2000

                              -------------------

    APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.

    If any securities being registered on this form will be offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933, as
amended, other than securities offered in connection with a dividend
reinvestment plan, check the following box. [ ]

                              -------------------

        CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

<Table>
                                                            PROPOSED          PROPOSED
                                                            MAXIMUM           MAXIMUM
          TITLE OF SECURITIES             AMOUNT BEING   OFFERING PRICE      AGGREGATE          AMOUNT OF
            BEING REGISTERED               REGISTERED      PER SHARE       OFFERING PRICE   REGISTRATION FEE(1)
<S>                                       <C>             <C>              <C>              <C>
Common Shares, $.001 par value..........  66,666 Shares       $15.00         $1,000,000          $80.90
</Table>

(1) Estimated solely for the purpose of calculating the registration fee.

                              -------------------

    THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
________________________________________________________________________________







<Page>
                                 COHEN & STEERS
                 REIT AND PREFERRED BALANCED INCOME FUND, INC.

                             CROSS REFERENCE SHEET

                              PART A -- PROSPECTUS

<Table>
<Caption>
                          ITEM IN PART A OF FORM N-2
                            SPECIFIED IN PROSPECTUS                       LOCATION IN PROSPECTUS
                            -----------------------                       ----------------------
<S>          <C>                                                    <C>
Item 1.      Outside Front Cover..................................  Cover Page
Item 2.      Inside Front and Outside Back Cover Page.............  Cover Page; Inside Front Cover
                                                                      Page; Outside Back Cover Page
Item 3.      Fee Table and Synopsis...............................  Fund Expenses
Item 4.      Financial Highlights.................................  Inapplicable
Item 5.      Plan of Distribution.................................  Cover Page; Prospectus Summary;
                                                                      Underwriting
Item 6.      Selling Shareholders.................................  Inapplicable
Item 7.      Use of Proceeds......................................  Use of Proceeds; Investment
                                                                      Objectives and Policies
Item 8.      General Description of the Registrant................  Cover Page; Prospectus Summary;
                                                                      The Fund; Investment Objectives
                                                                      and Policies; Use of Leverage;
                                                                      Principal Risks of the Fund;
                                                                      Additional Risk Considerations;
                                                                      Repurchase of Shares
Item 9.      Management...........................................  Prospectus Summary; Management of
                                                                      the Fund
Item 10.     Capital Stock, Long-Term Debt, and Other
               Securities.........................................  Investment Objectives and
                                                                    Policies; Use of Leverage;
                                                                      Dividends and Distributions;
                                                                      Taxation; Description of Shares
Item 11.     Defaults and Arrears on Senior Securities............  Inapplicable
Item 12.     Legal Proceedings....................................  Inapplicable
Item 13.     Table of Contents of the Statement of Additional
               Information........................................  Table of Contents of the Statement
                                                                      of Additional Information
</Table>

                 PART B -- STATEMENT OF ADDITIONAL INFORMATION

<Table>
<Caption>
                                                                          LOCATION IN STATEMENT
                          ITEMS IN PART B OF FORM N-2                   OF ADDITIONAL INFORMATION
                          ---------------------------                   -------------------------
<S>          <C>                                                    <C>
Item 14.     Cover Page...........................................  Cover Page
Item 15.     Table of Contents....................................  Table of Contents
Item 16.     General Information and History......................  Inapplicable
Item 17.     Investment Objectives and Policies...................  Investment Objectives and
                                                                    Policies; Investment Restrictions
Item 18.     Management...........................................  Management of the Fund;
                                                                      Compensation of Directors and
                                                                      Certain Officers; Investment
                                                                      Advisory and Other Services
Item 19.     Control Persons and Principal Holders of
               Securities.........................................  Management of the Fund
Item 20.     Investment Advisory and Other Services...............  Investment Advisory and Other
                                                                      Services
Item 21.     Brokerage Allocation and Other Practices.............  Portfolio Transactions and
                                                                      Brokerage; Determination of Net
                                                                      Asset Value
Item 22.     Tax Status...........................................  Taxation
Item 23.     Financial Statements.................................  Report of Independent Accountants;
                                                                      Statement of Assets and
                                                                      Liabilities
</Table>

                              PART C -- OTHER INFORMATION

<Table>
<S>          <C>
Item 24-33.  have been answered in Part C of this Registration
               Statement
</Table>







<Page>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

                  SUBJECT TO COMPLETION, DATED MARCH 26, 2003

PROSPECTUS

                                                           [COHEN & STEERS LOGO]

                                            SHARES

                                 COHEN & STEERS

                 REIT AND PREFERRED BALANCED INCOME FUND, INC.

                                 COMMON SHARES
                                $15.00 PER SHARE

                               -----------------

   Investment Objectives. Cohen & Steers REIT and Preferred Balanced Income
Fund, Inc. (the 'Fund') is a recently-organized, non-diversified, closed-end
management investment company.

    Our primary investment objective is high current income; and

    Our secondary objective is capital appreciation.

   Portfolio Contents. Under normal market conditions, the Fund will invest

    at least 40% of its total assets in common stocks issued by real estate
    companies, such as 'real estate investment trusts' or 'REITs';

    at least 40% of its total assets in preferred securities;

    up to 20% of its total assets in debt securities other than preferred
    securities;
                                                   (continued on following page)

   INVESTING IN THE COMMON SHARES INVOLVES RISKS THAT ARE DESCRIBED IN THE
'PRINCIPAL RISKS OF THE FUND' BEGINNING ON PAGE 37 OF THIS PROSPECTUS.

                               -----------------

<Table>
<Caption>
                                                              PER SHARE   TOTAL(2)
                                                              ---------   --------
<S>                                                           <C>         <C>
Public offering price.......................................    $15.00      $
Sales load..................................................         $      $
Estimated offering expenses(1)..............................         $      $
Proceeds, before expenses, to the Fund......................         $      $
</Table>

- ---------

(1) The Investment Manager has agreed to pay all organizational expenses and
    offering costs of the Fund (other than the sales load) that exceed $.03 per
    share of the Fund's Common Shares. The estimated offering expenses to be
    incurred by the Fund are $        .

(2) The Fund has granted the underwriters an option to purchase up to
    additional Common Shares at the public offering price less the sales load
    within 45 days of the date of this prospectus, solely to cover
    overallotments, if any. If such option is exercised in full, the total
    public offering price, sales load, estimated offering expenses and proceeds
    to the Fund will be $   , $   , $   and $   , respectively. See
    'Underwriting.'

   Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

   The Common Shares will be ready for delivery on or about         , 2003.

                               -----------------

                               -----------------

                 The date of this prospectus is         , 2003.




<Page>
      at least 25% of its total assets in the securities of companies
      principally engaged in the financial services industry. The policy of
      concentrating its investments in the financial services and real estate
      industries make the Fund more susceptible to adverse economic or
      regulatory occurrences affecting these sectors;

      up to 20% of its total assets in U.S. dollar denominated securities of
      foreign issuers traded or listed on a U.S. securities exchange; and

      no more than 5% of its total assets in preferred or other debt securities
      that at the time of the investment are rated below investment grade or
      that are unrated but judged to be of comparable quality by the Fund's
      Investment Manager.

    With respect to the preferred securities component of the portfolio, the
Fund expects that it will invest primarily in taxable preferred securities.

    Initially, the Fund will allocate approximately 50% of the Fund's total
assets to common stocks issued by real estate companies, including REITs,
approximately 40% to preferred securities and approximately 10% to debt
securities other than preferred securities. Thereafter, the portion of the
Fund's total assets invested in common stock issued by real estate companies,
preferred securities and other debt securities will vary from time to time,
consistent with the Fund's investment objectives and policies. There can be no
assurance that the Fund will achieve its investment objectives. See 'Investment
Objectives and Policies' and 'Principal Risks of the Fund.'

    Leverage. The Fund intends to use leverage by issuing shares of preferred
stock representing approximately 33 1/3% of the Fund's capital after their
issuance or alternatively through borrowing. Through leveraging, the Fund will
seek to obtain a higher return for holders of Common Shares than if the Fund did
not use leverage. Leverage is a speculative technique and there are special
risks and costs associated with leveraging. There can be no assurance that a
leveraging strategy will be successful during any period in which it is
employed. See 'Use of Leverage -- Leverage Risks.'

    No Prior History.  Because the Fund is recently organized, its common shares
have no history of public trading. The shares of closed-end investment companies
frequently trade at a discount from their net asset value. This risk may be
greater for investors expecting to sell their shares in a relatively short
period after completion of the public offering. The Fund's Common Shares have
been approved for listing on the New York Stock Exchange upon notice of
issuance, under the symbol '    .'







<Page>
                               TABLE OF CONTENTS

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Prospectus Summary..........................................    4
Summary of Fund Expenses....................................   22
The Fund....................................................   24
Use of Proceeds.............................................   24
Investment Objectives and Policies..........................   24
Use of Leverage.............................................   32
Interest Rate Transactions..................................   35
Principal Risks of the Fund.................................   37
Additional Risk Considerations..............................   46
How the Fund Manages Risk...................................   48
Management of the Fund......................................   49
Dividends and Distributions.................................   51
Closed-End Structure........................................   54
Possible Conversion to Open-End Status......................   54
Repurchase of Shares........................................   55
Taxation....................................................   56
Description of Shares.......................................   57
Certain Provisions of the Articles of Incorporation and
  By-Laws...................................................   59
Underwriting................................................   61
Custodian, Transfer Agent, Dividend Disbursing Agent and
  Registrar.................................................   63
Reports to Shareholders.....................................   63
Validity of the Shares......................................   63
Table of Contents of the Statement of Additional
  Information...............................................   64
</Table>

                              -------------------

    YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT, AND THE UNDERWRITERS HAVE NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. WE ARE NOT, AND THE UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU
SHOULD ASSUME THAT THE INFORMATION IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE
DATE OF THIS PROSPECTUS. OUR BUSINESS, FINANCIAL CONDITION AND PROSPECTS MAY
HAVE CHANGED SINCE THAT DATE.

    This prospectus sets forth concisely information about the Fund you should
know before investing. You should read the prospectus before deciding whether to
invest and retain it for future reference. A Statement of Additional
Information, dated           , 2003 (the 'SAI'), containing additional
information about the Fund, has been filed with the Securities and Exchange
Commission and is incorporated by reference in its entirety into this
prospectus. You can review the table of contents of the SAI on page   of this
prospectus. You may request a free copy of the SAI by calling (800) 437-9912.
You may also obtain the SAI and other information regarding the Fund on the
Securities and Exchange Commission web site (http://www.sec.gov).

    Through and including        , 2003 (25 days after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.

                                       3







<Page>
                               PROSPECTUS SUMMARY

    This is only a summary. This summary may not contain all of the information
that you should consider before investing in our Common Shares. You should
review the more detailed information contained in this prospectus and in the
SAI, especially the information set forth under the heading 'Principal Risks of
the Fund.'

<Table>
<S>                                            <C>
THE FUND.....................................  Cohen & Steers REIT and Preferred Balanced Income
                                               Fund, Inc. (the 'Fund') is a recently organized, non-
                                               diversified, closed-end management investment
                                               company.

THE OFFERING.................................  We are offering        shares of common stock
                                               ('Common Shares') through a group of underwriters led
                                               by                   . You must purchase at least 100
                                               Common Shares ($1,500). The underwriters have been
                                               granted an option to purchase up to        additional
                                               Common Shares solely to cover over-allotments, if
                                               any. The initial public offering price is $15.00 per
                                               share. See 'Underwriting.' Cohen & Steers Capital
                                               Management, Inc. (the 'Investment Manager') will be
                                               responsible for (i) all organizational expenses and
                                               (ii) offering costs (other than the sales load) that
                                               exceed $0.03 per share of the Fund's Common Shares.

INVESTMENT OBJECTIVES AND POLICIES...........  Our primary investment objective is high current
                                               income. Capital appreciation is our secondary
                                               objective. Our investment objectives and certain
                                               investment policies are considered fundamental and
                                               may not be changed without shareholder approval. See
                                               'Investment Objectives and Policies.'

                                               Under normal market conditions, the Fund seeks to
                                               achieve its objective through a balanced portfolio of
                                               income producing common stock issued by real estate
                                               companies, including REITs, and preferred and other
                                               debt securities. Initially, the Fund will allocate
                                               approximately 50% of the Fund's total assets to
                                               common stocks issued by real estate companies,
                                               including REITs, approximately 40% to preferred
                                               securities and approximately 10% to debt securities
                                               other than preferred securities. Thereafter, the
                                               portion of the Fund's total assets invested in common
                                               stock issued by real estate companies, preferred
                                               securities and other debt securities will vary from
                                               time to time, consistent with the Fund's investment
                                               objectives, although the Fund will normally invest at
                                               least 40% of its total assets in common stock issued
                                               by real estate companies and at least 40% of its
                                               total assets in preferred securities.
</Table>

                                       4




<Page>

<Table>
<S>                                            <C>
                                               Common Stocks issued by Real Estate Companies. At
                                               least 40% of the Fund's total assets will be invested
                                               in common stocks issued by real estate companies,
                                               such as 'real estate investment trusts' or 'REITs'.
                                               Substantially all of the common stocks issued by
                                               REITs in which the Fund intends to invest are traded
                                               on a national securities exchange or in the
                                               over-the-counter market. A real estate company
                                               derives at least 50% of its revenue from real estate
                                               or has at least 50% of its assets in real estate. A
                                               REIT is a company dedicated to owning, and usually
                                               operating, income producing real estate, or to
                                               financing real estate. REITs are generally not taxed
                                               on income distributed to shareholders provided they
                                               distribute to their shareholders substantially all of
                                               their taxable income (other than net capital gains)
                                               and otherwise comply with the requirements of the
                                               Internal Revenue Code of 1986, as amended (the
                                               'Code'). As a result, REITs generally pay relatively
                                               higher dividends (as compared to other types of
                                               companies) and the Fund intends to use these REIT
                                               dividends in an effort to meet its objective of high
                                               current income. It is the Fund's current intention to
                                               invest approximately 50% of its total assets in
                                               common stocks of real estate companies, although the
                                               actual percentage in its portfolio may change.

                                               Preferred Securities. At least 40% of the Fund's
                                               total assets will be invested in preferred
                                               securities. Preferred securities pay fixed or
                                               floating dividends to investors, and have
                                               'preference' over common stock in the payment of
                                               dividends and the liquidation of a company's assets.
                                               This means that a company must pay dividends on
                                               preferred stock before paying dividends on its common
                                               stock. Preferred stockholders usually have no right
                                               to vote for corporate directors or on other matters.
                                               The Fund expects that, under current market
                                               conditions, it will invest primarily in taxable
                                               preferred securities. The taxable preferred
                                               securities in which the Fund intends to invest do not
                                               qualify for the dividends received deduction (the
                                               'DRD') under Section 243 of the Code. The DRD generally
                                               allows corporations to deduct from their income 70%
                                               of dividends received. Accordingly, any corporate
                                               shareholder who otherwise would qualify for the DRD
                                               should assume that none of the distributions it
                                               receives from the Fund will qualify
</Table>

                                       5




<Page>

<Table>
<S>                                            <C>
                                               for the DRD. The Fund may also invest up to 5% of its
                                               total assets in preferred securities issued by REITs.
                                               Under current market conditions, the Fund's
                                               investments in preferred securities are expected to
                                               consist primarily of fixed rate preferred securities.
                                               When used in this prospectus, taxable preferred
                                               securities refer generally to hybrid-preferred
                                               securities as well as certain types of traditional
                                               preferred securities that are not eligible for the
                                               DRD, such as REIT preferred securities.

                                               The Fund may invest up to 20% of its total assets in
                                               debt securities, including convertible debt
                                               securities and convertible preferred securities.
                                               Common stock acquired pursuant to a conversion
                                               feature will be subject to this 20% limitation.

                                               The Fund will invest more than 25% of its total
                                               assets in the securities of companies principally
                                               engaged in the financial services industry (which are
                                               prominent issuers of preferred securities). In
                                               addition, the Fund will invest at least 40% of its
                                               total assets in securities issued by real estate
                                               companies, including REITs. These policies of
                                               concentrating its investments in the financial
                                               services and real estate industries make the Fund
                                               more susceptible to adverse economic or regulatory
                                               occurrences affecting these sectors.

                                               The Fund also may invest up to 20% of its total
                                               assets in U.S. dollar denominated securities of
                                               foreign issuers traded or listed on a U.S. securities
                                               exchange.

                                               The Fund also may invest up to 5% of its total assets
                                               in preferred or other debt securities that at the
                                               time of investment are rated below investment grade
                                               (commonly known as 'junk bonds') or that are unrated
                                               but judged to be of comparable quality by the Fund's
                                               Investment Manager. While the Fund does not currently
                                               intend to invest in illiquid securities (i.e.,
                                               securities that are not readily marketable), it may
                                               invest up to 10% of its total assets in illiquid
                                               securities.

                                               The Fund will generally not invest more than 10% of
                                               its total assets in the securities of one issuer. The
                                               Fund may engage in portfolio trading when considered
                                               appropriate, but short-term trading will not be used
                                               as the primary means of achieving the Fund's
                                               investment objectives.

                                               There are no limits on portfolio turnover, and
                                               investments may be sold without regard to length of
                                               time held when, in the opinion of the Investment
                                               Manager, investment considerations warrant such
                                               action. A higher portfolio turnover rate results in
                                               correspondingly greater brokerage commissions and
                                               other
</Table>

                                       6




<Page>

<Table>
<S>                                            <C>
                                               transactional expenses that are borne by the Fund.
                                               High portfolio turnover may result in the realization
                                               of net short-term capital gains by the Fund which,
                                               when distributed to shareholders, will be taxable as
                                               ordinary income.

                                               There can be no assurance that our investment
                                               objectives will be achieved. See 'Investment
                                               Objectives and Policies.'

USE OF LEVERAGE..............................  Subject to market conditions and the Fund's receipt
                                               of a AAA/aaa credit rating on the Fund's preferred
                                               stock, approximately one to three months after
                                               completion of this offering, the Fund intends to
                                               offer shares of preferred stock ('Fund Preferred
                                               Shares') representing approximately 33 1/3% of the
                                               Fund's capital after their issuance. The issuance of
                                               Fund Preferred Shares will leverage your investment
                                               in Common Shares. As an alternative to the Fund
                                               Preferred Shares, the Fund may leverage through
                                               borrowing. The Fund Preferred Shares and any
                                               borrowings will have seniority over the Common
                                               Shares.

                                               The use of leverage creates an opportunity for
                                               increased Common Share net income, but also creates
                                               special risks for holders of Common Shares ('Common
                                               Shareholders'). The Fund Preferred Shares will pay
                                               dividends based on short-term rates, which will be
                                               reset frequently. Alternatively, borrowings may be at
                                               a fixed or floating rate. The Fund may seek to
                                               protect itself from the risk of increasing dividends
                                               or interest expenses resulting from an increase in
                                               short-term interest rates by entering into a swap or
                                               cap transaction as to all or a portion of the Fund
                                               Preferred Shares or any borrowings. See 'Interest
                                               Rate Transactions.' As long as the rate of return,
                                               net of applicable Fund expenses, on the Fund's
                                               portfolio investments exceeds Fund Preferred Share
                                               dividend rates, as reset periodically, interest on
                                               any borrowings (as modified by any cap or the payment
                                               rate set by any interest rate swap), the investment
                                               of the proceeds of the Fund Preferred Shares or any
                                               borrowings will generate more income than will be
                                               needed to pay such dividends, interest rate or swap
                                               payment. If so, the excess will be available to pay
                                               higher dividends to Common Shareholders. If, however,
                                               the dividends or interest rate on any borrowings (as
                                               modified by any cap or payment rate set by any
                                               interest rate
</Table>

                                       7




<Page>

<Table>
<S>                                            <C>
                                               swap) exceeds the rate of return on the Fund's
                                               investment portfolio, the return to Common
                                               Shareholders will be less than if the Fund had not
                                               leveraged.

                                               The holders of Fund Preferred Shares voting as a
                                               separate class will be entitled to elect two members
                                               of the Board of Directors of the Fund and in the
                                               event that the Fund fails to pay two full years of
                                               accrued dividends on the Fund Preferred Shares, the
                                               holders of the Fund Preferred Shares will be entitled
                                               to elect a majority of the members of the Board of
                                               Directors. See 'Use of Leverage' and 'Description of
                                               Shares -- Fund Preferred Shares.'

                                               There is no assurance that the Fund will utilize
                                               leverage or that, if utilized, the Fund's leveraging
                                               strategy will be successful. See 'Use of
                                               Leverage -- Leverage Risk.'

                                               Leverage Risk. Leverage creates two major types of
                                               risks for Common Shareholders:

                                                the likelihood of greater volatility of net asset
                                                value and market price of Common Shares because
                                                changes in the value of the Fund's portfolio
                                                (including changes in the value of any interest rate
                                                swap, if applicable) are borne entirely by the
                                                Common Shareholders; and

                                                the possibility either that Common Share income will
                                                fall if the dividend rate on the Fund Preferred
                                                Shares or the interest rate on any borrowings rises,
                                                or that Common Share income will fluctuate because
                                                the dividend rate on the Fund Preferred Shares or
                                                the interest rate on any borrowings varies.

                                               When the Fund is utilizing leverage, the fees paid to
                                               the Investment Manager for investment advisory and
                                               management services will be higher than if the Fund
                                               did not utilize leverage because the fees paid will
                                               be calculated based on the Fund's managed assets
                                               (which equals the net asset value of the Common
                                               Shares plus the liquidation preference on any Fund
                                               Preferred Shares plus the principal amount of any
                                               borrowings).

INTEREST RATE TRANSACTIONS...................  In order to reduce the interest rate risk inherent in
                                               our underlying investments and capital structure, we
                                               may enter into interest rate swap or cap
                                               transactions. The use of interest rate swaps and caps
                                               is a highly specialized activity that involves
                                               investment techniques and risks different from those
                                               associated with ordinary portfolio security
                                               transactions. In an interest rate swap, the Fund
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                                               would agree to pay to the other party to the interest
                                               rate swap (which is known as the 'counterparty') a
                                               fixed rate payment in exchange for the counterparty
                                               agreeing to pay to the Fund a variable rate payment
                                               that is intended to approximate the Fund's variable
                                               rate payment obligation on the Fund Preferred Shares
                                               or any variable rate borrowing. The payment
                                               obligations would be based on the notional amount of
                                               the swap. In an interest rate cap, the Fund would pay
                                               a premium to the counterparty to the interest rate
                                               cap and, to the extent that a specified variable rate
                                               index exceeds a predetermined fixed rate, would
                                               receive from the counterparty payments of the
                                               difference based on the notional amount of such cap.
                                               Depending on the state of interest rates in general,
                                               our use of interest rate swaps or caps could enhance
                                               or harm the overall performance of the Common Shares.
                                               To the extent there is a decline in interest rates,
                                               the value of the interest rate swap or cap could
                                               decline, and could result in a decline in the net
                                               asset value of the Common Shares. In addition, if the
                                               counterparty to an interest rate swap or cap
                                               defaults, the Fund would be obligated to make the
                                               payments that it had intended to avoid. Depending on
                                               whether the Fund would be entitled to receive net
                                               payments from the counterparty on the swap or cap,
                                               which in turn would depend on the general state of
                                               short-term interest rates and the returns on the
                                               Fund's portfolio securities at that point in time,
                                               such default could negatively impact the performance
                                               of the Fund's Common Shares. In addition, at the time
                                               an interest rate swap or cap transaction reaches its
                                               scheduled termination date, there is a risk that the
                                               Fund will not be able to obtain a replacement
                                               transaction or that the terms of the replacement will
                                               not be as favorable as on the expiring transaction.
                                               If this occurs, it could have a negative impact on
                                               the performance of the Common Shares. If the Fund
                                               fails to maintain the required 200% asset coverage of
                                               the liquidation value of the outstanding Fund
                                               Preferred Shares or if the Fund loses its expected
                                               AAA/aaa rating on the Fund Preferred Shares or fails
                                               to maintain other covenants, the Fund may be required
                                               to redeem some or all of the Fund Preferred Shares.
                                               Similarly, the Fund could be required to prepay the
                                               principal amount of any borrowings. Such redemption
                                               or prepayment would likely result in the Fund seeking
                                               to terminate early all or a
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                                               portion of any swap or cap transaction. Early
                                               termination of the swap could result in a termination
                                               payment by or to the Fund. Early termination of a cap
                                               could result in a termination payment to the Fund.
                                               The Fund intends to maintain in a segregated account
                                               with its custodian cash or liquid securities having a
                                               value at least equal to the Fund's net payment
                                               obligations under any swap transaction,
                                               marked-to-market daily. We would not enter into
                                               interest rate swap or cap transactions having an
                                               aggregate notional amount that exceeded the
                                               outstanding amount of the Fund's leverage. See 'Use
                                               of Leverage' and 'Interest Rate Transactions' for
                                               additional information.

PRINCIPAL RISKS OF THE FUND..................  We are a non-diversified, closed-end management
                                               investment company designed primarily as a long-term
                                               investment and not as a trading vehicle. The Fund is
                                               not intended to be a complete investment program and,
                                               due to the uncertainty inherent in all investments,
                                               there can be no assurance that we will achieve our
                                               investment objectives.

                                               No Operating History. As a recently organized entity,
                                               we have no operating history. See 'The Fund.'

                                               Investment Risk. An investment in the Fund is subject
                                               to investment risk, including the possible loss of
                                               the entire principal amount that you invest.

                                               Stock Market Risk. Your investment in Common Shares
                                               represents an indirect investment in the common
                                               stock, preferred securities and other securities
                                               owned by the Fund, substantially all of which are
                                               traded on a national securities exchange or in the
                                               over-the-counter markets. The value of these
                                               securities, like other stock market investments, may
                                               move up or down, sometimes rapidly and unpredictably.
                                               Your Common Shares at any point in time may be worth
                                               less than what you invested, even after taking into
                                               account the reinvestment of Fund dividends and
                                               distributions. The Fund may utilize leverage, which
                                               magnifies the stock market risk. See 'Use of
                                               Leverage -- Leverage Risk.'

                                               Interest Rate Risk. Interest rate risk is the risk
                                               that fixed-income securities such as preferred and
                                               debt securities will decline in value because of
                                               changes in market interest rates. When market
                                               interest rates rise, the market value of such
                                               securities generally will fall. The Fund's investment
                                               in such securities means that the net
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                                               asset value and market price of the common shares may
                                               tend to decline if market interest rates rise.

                                               During periods of declining interest rates, an issuer
                                               may be able to exercise an option to prepay principal
                                               earlier than scheduled, which is generally known as
                                               call or prepayment risk. If this occurs, the Fund may
                                               be forced to reinvest in lower yielding securities.
                                               This is known as reinvestment risk. Preferred and
                                               debt securities frequently have call features that
                                               allow the issuer to repurchase the security prior to
                                               its stated maturity. An issuer may redeem an
                                               obligation if the issuer can refinance the debt at a
                                               lower cost due to declining interest rates or an
                                               improvement in the credit standing of the issuer.
                                               During periods of rising interest rates, the average
                                               life of certain types of securities may be extended
                                               because of slower than expected principal payments.
                                               This may lock in a below market interest rate,
                                               increase the security's duration and reduce the value
                                               of the security. This is known as extension risk.

                                               Market interest rates for investment grade
                                               fixed-income securities in which the Fund will invest
                                               have recently declined significantly below the recent
                                               historical average rates for such securities. This
                                               decline may have increased the risk that these rates
                                               will rise in the future (which would cause the value
                                               of the Fund's net assets to decline) and the degree
                                               to which asset values may decline in such events;
                                               however, historical interest rate levels are not
                                               necessarily predictive of future interest rate
                                               levels. See 'Principal Risks of the Fund -- Interest
                                               Rate Risk.'

                                               Credit Risk and Lower-Rated Securities Risk. Credit
                                               risk is the risk that a security in the Fund's
                                               portfolio will decline in price or the issuer will
                                               fail to make dividend, interest or principal payments
                                               when due because the issuer of the security
                                               experiences a decline in its financial status.
                                               Preferred securities are subordinated to bonds and
                                               other debt instruments in a company's capital
                                               structure, in terms of priority to corporate income,
                                               and therefore will be subject to greater credit risk
                                               than debt instruments. The Fund may invest up to 5%
                                               (measured at the time of investment) of its total
                                               assets in preferred securities and other debt
                                               securities that are rated below investment grade.
                                               Preferred stock or debt securities will be considered
                                               to be investment grade
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                                               if, at the time of the investment, such security has
                                               a rating of 'BBB' or higher by Standard & Poor's
                                               Rating Services ('S&P'), 'Baa' or higher by Moody's
                                               Investors Service, Inc. ('Moody's') or an equivalent
                                               rating by a nationally recognized statistical rating
                                               agency or, if unrated, such security is determined by
                                               the Investment Manager to be of comparable quality.
                                               Lower-rated preferred stock or other debt securities,
                                               or equivalent unrated securities, which are commonly
                                               known as 'junk bonds,' generally involve greater
                                               volatility of price and risk of loss of income and
                                               principal, and may be more susceptible to real or
                                               perceived adverse economic and competitive industry
                                               conditions than higher grade securities. It is
                                               reasonable to expect that any adverse economic
                                               conditions could disrupt the market for lower-rated
                                               securities, have an adverse impact on the value of
                                               those securities, and adversely affect the ability of
                                               the issuers of those securities to repay principal
                                               and interest on those securities.

                                               Special Risks Related to Real Estate. Since at least
                                               40% of the Fund's total assets will be concentrated
                                               in common stock of real estate companies, your
                                               investment in the Fund will be significantly impacted
                                               by the performance of the real estate markets.
                                               Property values may fall due to increasing vacancies
                                               or declining rents resulting from economic, legal,
                                               cultural or technological developments. REIT prices
                                               also may drop because of the failure of borrowers to
                                               pay their loans and poor management. Many REITs
                                               utilize leverage which increases investment risk and
                                               could adversely affect a REIT's operations and market
                                               value in periods of rising interest rates as well as
                                               risks normally associated with debt financing. In
                                               addition, there are risks associated with particular
                                               sectors of real estate investments.

                                                    -- Retail Properties. Retail properties are
                                                       affected by the overall health of the applicable
                                                       economy and may be adversely affected by the
                                                       growth of alternative forms of retailing,
                                                       bankruptcy, departure or cessation of
                                                       operations of a tenant, a shift in consumer
                                                       demand due to demographic changes, spending
                                                       patterns and lease terminations.

                                                    -- Office Properties. Office properties are
                                                       affected by the overall health of the economy,
                                                       and other factors such as a downturn in the
                                                       businesses
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                                                       operated by their tenants, obsolescence and
                                                       non-competitiveness.

                                                    -- Hotel Properties. The risks of hotel
                                                       properties include, among other things, the
                                                       necessity of a high level of continuing
                                                       capital expenditures, competition, increases
                                                       in operating costs which may not be offset by
                                                       increases in revenues, dependence on business
                                                       and commercial travelers and tourism,
                                                       increases in fuel costs and other expenses of
                                                       travel, and adverse effects of general and
                                                       local economic conditions. Hotel properties
                                                       tend to be more sensitive to adverse economic
                                                       conditions and competition than many other
                                                       commercial properties.

                                                    -- Healthcare Properties. Healthcare properties
                                                       and healthcare providers are affected by several
                                                       significant factors including federal, state
                                                       and local laws governing licenses,
                                                       certification, adequacy of care,
                                                       pharmaceutical distribution, rates,
                                                       equipment, personnel and other factors
                                                       regarding operations; continued availability
                                                       of revenue from government reimbursement
                                                       programs (primarily Medicaid and Medicare);
                                                       and competition on a local and regional
                                                       basis. The failure of any healthcare operator
                                                       to comply with governmental laws and
                                                       regulations may affect its ability to operate
                                                       its facility or receive government
                                                       reimbursements.

                                                    -- Multifamily Properties. The value and
                                                       successful operation of a multifamily property
                                                       may be affected by a number of factors such
                                                       as the location of the property, the ability
                                                       of the management team, the level of mortgage
                                                       rates, presence of competing properties,
                                                       adverse economic conditions in the locale,
                                                       oversupply, and rent control laws or other
                                                       laws affecting such properties.

                                                    -- Insurance. Certain of the portfolio companies
                                                       may carry comprehensive liability, fire, flood,
                                                       earthquake extended coverage and rental loss
                                                       insurance with various policy specifications,
                                                       limits and deductibles. Should any type of
                                                       uninsured loss occur, the portfolio company
                                                       could lose its investment in, and anticipated
                                                       profits and cash
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                                                       flows from, a number of properties and as a
                                                       result impact the Fund's investment
                                                       performance.

                                                    -- Credit Risk. REITs may be highly leveraged
                                                       and financial covenants may affect the ability of
                                                       REITs to operate effectively.

                                                    -- Environmental Issues. In connection with the
                                                       ownership (direct or indirect), operation,
                                                       management and development of real properties
                                                       that may contain hazardous or toxic
                                                       substances, a portfolio company may be
                                                       considered an owner, operator or responsible
                                                       party of such properties and, therefore, may
                                                       be potentially liable for removal or
                                                       remediation costs, as well as certain other
                                                       costs, including governmental fines and
                                                       liabilities for injuries to persons and
                                                       property. The existence of any such material
                                                       environmental liability could have a material
                                                       adverse effect on the results of operations
                                                       and cash flow of any such portfolio company
                                                       and, as a result, the amount available to
                                                       make distributions on shares of the Fund
                                                       could be reduced.

                                                    -- Smaller Companies. Even the larger REITs in
                                                       the industry tend to be small to medium-sized
                                                       companies in relation to the equity markets
                                                       as a whole. REIT shares, therefore, can be
                                                       more volatile than, and perform differently
                                                       from, larger company stocks. There may be
                                                       less trading in a smaller company's stock,
                                                       which means that buy and sell transactions in
                                                       that stock could have a larger impact on the
                                                       stock's price than is the case with larger
                                                       company stocks. Further, smaller companies
                                                       may have fewer business lines; changes in any
                                                       one line of business, therefore, may have a
                                                       greater impact on a smaller company's stock
                                                       price than is the case for a larger company.

                                               As of March   , 2003, the market capitalization of
                                               REITs ranged in size from approximately $  million to
                                               approximately $   billion.

                                               See 'Principal Risks of the Fund -- Special Risks of
                                               Securities Linked to the Real Estate Market.'

                                               Special Risks Related to Preferred Securities. There
                                               are special risks associated with investing in
                                               preferred securities, including:
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                                                    -- Deferral and Omission. Preferred securities
                                                       may include provisions that permit the issuer, at
                                                       its discretion, to defer or omit
                                                       distributions for a stated period without any
                                                       adverse consequences to the issuer. If the
                                                       Fund owns a preferred security that is
                                                       deferring or omitting its distributions, the
                                                       Fund may be required to report income for tax
                                                       purposes although it has not yet received
                                                       such income.

                                                    -- Subordination. Preferred securities are
                                                       generally subordinated to bonds and other debt
                                                       instruments in a company's capital structure
                                                       in terms of having priority to corporate
                                                       income and liquidation payments, and
                                                       therefore will be subject to greater credit
                                                       risk than more senior debt instruments.

                                                    -- Liquidity. Preferred securities may be
                                                       substantially less liquid than many other
                                                       securities, such as common stocks or U.S.
                                                       Government securities.

                                                    -- Limited Voting Rights. Generally, traditional
                                                       preferred securities offer no voting rights
                                                       with respect to the issuing company unless
                                                       preferred dividends have been in arrears for
                                                       a specified number of periods, at which time
                                                       the preferred security holders may elect a
                                                       number of directors to the issuer's board.
                                                       Generally, once all the arrearages have been
                                                       paid, the preferred security holders no
                                                       longer have voting rights. In the case of
                                                       hybrid-preferred securities, as described
                                                       under 'Investment Objectives and Policies,'
                                                       holders generally have no voting rights.

                                                    -- Special Redemption Rights. In certain varying
                                                       circumstances, an issuer of preferred
                                                       securities may redeem the securities prior to
                                                       a specified date. For instance, for certain
                                                       types of preferred securities, a redemption
                                                       may be triggered by certain changes in
                                                       Federal income tax or securities laws. As
                                                       with call provisions, a special redemption by
                                                       the issuer may negatively impact the return
                                                       of the security held by the Fund. See
                                                       'Principal Risks of the Fund -- Special Risks
                                                       Related to Preferred Securities.'

                                               General Financial Services Risks. The Fund intends to
                                               invest at least 25% of its total assets in the
                                               securities of companies principally engaged in
                                               financial services, which
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                                               are prominent issuers of preferred securities. This
                                               policy makes the Fund more susceptible to adverse
                                               economic or regulatory occurrences affecting that
                                               sector. A company is 'principally engaged' in
                                               financial services if it owns financial
                                               services-related assets that are responsible for at
                                               least 50% of its revenues. Companies in the financial
                                               services sector include commercial banks, industrial
                                               banks, savings institutions, finance companies,
                                               diversified financial services companies, investment
                                               banking firms, securities brokerage houses,
                                               investment advisory companies, leasing companies,
                                               insurance companies and companies providing similar
                                               services. Concentration of investments in the
                                               financial services sector includes the following
                                               risks:

                                                financial services companies may suffer a setback if
                                                regulators change the rules under which they
                                                operate;

                                                unstable interest rates can have a disproportionate
                                                effect on the financial services sector;

                                                financial services companies whose securities the
                                                Fund may purchase may themselves have concentrated
                                                portfolios, such as a high level of loans to real
                                                estate developers, which makes them vulnerable to
                                                economic conditions that affect that sector; and

                                                financial services companies have been affected by
                                                increased competition, which could adversely affect
                                                the profitability or viability of such companies.
                                                See 'Principal Risks of the Fund -- General Risks of
                                                Securities Limited to the Financial Services
                                                Industry.'

                                               Foreign Securities. Under normal market conditions,
                                               the Fund may invest up to 20% of its total assets in
                                               U.S. dollar denominated securities of foreign issuers
                                               traded or listed on a U.S. securities exchange. Such
                                               investments involve certain risks not involved in
                                               U.S. issuers. Certain foreign countries may impose
                                               restrictions on the ability of issuers of foreign
                                               securities to make payments of principal and interest
                                               to investors located outside the country, due to
                                               blockage of foreign currency exchanges or otherwise.
                                               Generally, there is less publicly available
                                               information about foreign companies due to less
                                               rigorous disclosure or accounting standards and
                                               regulatory practices. In addition, the Fund will be
                                               subject to risks associated with adverse political
                                               and economic developments in foreign countries, which
                                               could cause the Fund to lose money on its investments
                                               in foreign
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                                               securities. Typically, the Fund will not hold any
                                               foreign securities of issuers in so-called 'emerging
                                               markets' (or lesser developed countries), but to the
                                               extent it does, the Fund will not invest more than
                                               10% of its total assets in such securities.
                                               Investments in such securities are particularly
                                               speculative.

                                               Convertible Securities. Although to a lesser extent
                                               than with nonconvertible fixed income securities, the
                                               market value of convertible securities tends to
                                               decline as interest rates increase and, conversely,
                                               tends to increase as interest rates decline. In
                                               addition, because of the conversion feature, the
                                               market value of convertible securities tends to vary
                                               with fluctuations in the market value of the
                                               underlying common stock. A unique feature of
                                               convertible securities is that as the market price of
                                               the underlying common stock declines, convertible
                                               securities tend to trade increasingly on a yield
                                               basis, and so may not experience market value
                                               declines to the same extent as the underlying common
                                               stock. When the market price of the underlying common
                                               stock increases, the prices of the convertible
                                               securities tend to rise as a reflection of the value
                                               of the underlying common stock. While no securities
                                               investments are without risk, investments in
                                               convertible securities generally entail less risk
                                               than investments in common stock of the same issuer.

                                               Common Stock Risk. While common stock has
                                               historically generated higher average returns than
                                               fixed income securities, common stock has also
                                               experienced significantly more volatility in those
                                               returns. An adverse event, such as an unfavorable
                                               earnings report, may depress the value of common
                                               stock held by the Fund. Also, the price of common
                                               stock is sensitive to general movements in the stock
                                               market. A drop in the stock market may depress the
                                               price of common stock held by the Fund.

                                               Tax Risk. The Fund may invest in preferred securities
                                               or other securities the Federal income tax treatment
                                               of which may not be clear or may be subject to
                                               recharacterization by the Internal Revenue Service.
                                               It could be more difficult for the Fund to comply
                                               with the tax requirements applicable to regulated
                                               investment companies (See 'Taxation') if the tax
                                               characterization of the Fund's investments or the tax
                                               treatment of the
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                                               income from such investments were successfully
                                               challenged by the Internal Revenue Service. The Bush
                                               Administration has announced a proposal to eliminate
                                               the Federal income tax on dividends of income
                                               previously taxed at the corporate level. The
                                               availability of tax-free dividends may reduce the
                                               value of, and return on, certain securities that are
                                               part of the Fund's investment portfolio. Moreover,
                                               the proposal may be given retroactive effect. This
                                               change could adversely affect the Fund's shareholders
                                               and distributions they receive from the Fund.

                                               Market Price Discount From Net Asset Value. Shares of
                                               closed-end investment companies frequently trade at a
                                               discount from their net asset value. This
                                               characteristic is a risk separate and distinct from
                                               the risk that net asset value could decrease as a
                                               result of investment activities and may be greater
                                               for investors expecting to sell their shares in a
                                               relatively short period following completion of this
                                               offering. We cannot predict whether the shares will
                                               trade at, above or below net asset value. Net asset
                                               value will be reduced immediately following the
                                               offering by the sales load and the amount of
                                               organizational and offering expenses paid by the
                                               Fund. See 'Principal Risks of the Fund -- Market
                                               Price Discount From Net Asset Value.'

                                               Market Disruption Risk. The terrorist attacks in the
                                               U.S. on September 11, 2001 had a disruptive effect on
                                               the securities markets. The war in Iraq also has
                                               resulted in recent market volatility and may have
                                               long-term effects on the U.S. and worldwide financial
                                               markets and may cause further economic uncertainties
                                               in the U.S. and worldwide. The Fund cannot predict
                                               the effects of the war or similar events in the
                                               future on the U.S. economy and securities markets.

ADDITIONAL RISK CONSIDERATIONS...............  Portfolio Turnover. We may engage in portfolio
                                               trading when considered appropriate. There are no
                                               limits on the rate of portfolio turnover. A higher
                                               turnover rate results in correspondingly greater
                                               brokerage commissions and other transactional
                                               expenses which are borne by the Fund. See 'Additional
                                               Risk Considerations -- Portfolio Turnover.'

                                               Inflation Risk. Inflation risk is the risk that the
                                               value of assets or income from investments will be
                                               worth less than in the future as inflation decreases
                                               the value of
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                                               money. As inflation increases, the real value of the
                                               Common Shares and distributions can decline and the
                                               dividend payments on the Fund Preferred Shares, if
                                               any, or interest payments on any borrowings may
                                               increase. See 'Additional Risk
                                               Considerations -- Inflation Risk.'

                                               Non-Diversified Status. Because we, as a
                                               non-diversified investment company, may invest in a
                                               smaller number of individual issuers than a
                                               diversified investment company, an investment in the
                                               Fund presents greater risk to you than an investment
                                               in a diversified company. We intend to comply with
                                               the diversification requirements of the Code
                                               applicable to regulated investment companies. See
                                               'Additional Risk Considerations -- Non-Diversified
                                               Status.' See also 'Taxation' in the SAI.

                                               Anti-Takeover Provisions. Certain provisions of our
                                               Articles of Incorporation and By-Laws could have the
                                               effect of limiting the ability of other entities or
                                               persons to acquire control of the Fund or to modify
                                               our structure. The provisions may have the effect of
                                               depriving you of an opportunity to sell your shares
                                               at a premium over prevailing market prices and may
                                               have the effect of inhibiting conversion of the Fund
                                               to an open-end investment company. See 'Certain
                                               Provisions of the Articles of Incorporation and
                                               By-Laws' and 'Additional Risk
                                               Considerations -- Anti-Takeover Provisions.'

                                               Given the risks described above, an investment in the
                                               shares may not be appropriate for all investors. You
                                               should carefully consider your ability to assume
                                               these risks before making an investment in the Fund.

INVESTMENT MANAGER...........................  Cohen & Steers Capital Management, Inc. is the
                                               investment manager pursuant to an Investment
                                               Management Agreement. The Investment Manager, which
                                               was formed in 1986, is a leading firm specializing in
                                               the management of real estate securities portfolios
                                               and as of March   , 2003 had approximately $
                                               billion in assets under management, including more
                                               than $    million in preferred securities issued by
                                               real estate companies. Its clients include pension
                                               plans, endowment funds and mutual funds, including
                                               some of the largest open-end and closed-end real
                                               estate funds. The Investment Manager also will have
                                               responsibility for providing administrative services,
                                               and assisting the Fund with operational needs
                                               pursuant to an Administration Agreement. In
                                               accordance with the terms of the Administration
                                               Agreement, the
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                                               Fund has entered into an agreement with State Street
                                               Bank and Trust Company ('State Street Bank') to
                                               perform certain administrative functions subject to
                                               the supervision of the Investment Manager (the 'Sub-
                                               Administration Agreement'). See 'Management of the
                                               Fund -- Administration and Sub-Administration
                                               Agreement.'

FEES AND EXPENSES............................  The Fund will pay the Investment Manager a monthly
                                               fee computed at the annual rate of    % of average
                                               daily managed assets (i.e., the net asset value of
                                               Common Shares plus the liquidation preference of any
                                               Fund Preferred Shares and the principal amount of any
                                               borrowings used for leverage). See 'Management of the
                                               Fund -- Investment Manager.' When the Fund is
                                               utilizing leverage, the fees paid to the Investment
                                               Manager for investment advisory and management
                                               services will be higher than if the Fund did not
                                               utilize leverage because the fees paid will be
                                               calculated based on the Fund's managed assets, which
                                               include the liquidation preference of preferred
                                               stock, and the principal amount of any outstanding
                                               borrowings used for leverage. The Fund's investment
                                               management fees and other expenses are paid only by
                                               the Common Shareholders, and not by holders of the
                                               Fund Preferred Shares. See 'Use of Leverage.'

LISTING AND SYMBOL...........................  The Fund's Common Shares have been approved for
                                               listing on the New York Stock Exchange upon notice of
                                               issuance under the symbol '    .'

DIVIDENDS AND DISTRIBUTIONS..................  Commencing with the Fund's first dividend, the Fund
                                               intends to make regular monthly cash distributions to
                                               Common Shareholders at a level rate based on the
                                               projected performance of the Fund, which rate may be
                                               adjusted from time to time. The Fund's ability to
                                               maintain a level dividend rate will depend on a
                                               number of factors, including the stability of income
                                               received from its investments and dividends payable
                                               on the Fund Preferred Shares or interest payments on
                                               borrowings. As portfolio and market conditions
                                               change, the rate of dividends on the Common Shares
                                               and the Fund's dividend policy will likely change.
                                               Over time, the Fund will distribute all of its net
                                               investment income (after it pays accrued dividends
                                               on, or redeems or liquidates, any outstanding Fund
                                               Preferred Shares and pays interest and required
                                               principal payments on any borrowings). In addition,
                                               at least annually, the Fund intends to distribute
</Table>

                                       20




<Page>

<Table>
<S>                                            <C>
                                               net capital gain and taxable ordinary income, if any,
                                               to shareholders so long as the net capital gain and
                                               taxable ordinary income are not necessary to pay
                                               accrued dividends on, or redeem or liquidate any Fund
                                               Preferred Shares, or pay interest or required
                                               principal payments on any borrowings. Your initial
                                               distribution is expected to be declared approximately
                                               45 days, and paid approximately 60 to 75 days, from
                                               the completion of this offering, depending on market
                                               conditions. Following the commencement of this
                                               offering, the Fund intends to rely on an exemptive
                                               order issued by the Securities and Exchange
                                               Commission under the Investment Company Act of 1940
                                               (the '1940 Act') facilitating the implementation of a
                                               dividend policy calling for monthly distributions of
                                               a fixed percentage of its net asset value ('Managed
                                               Dividend Policy'). See 'Dividends and Distributions.'

DIVIDEND REINVESTMENT PLAN...................  Shareholders will receive their dividends in
                                               additional Common Shares purchased in the open market
                                               or issued by the Fund through the Fund's Dividend
                                               Reinvestment Plan, unless they elect to have their
                                               dividends and other distributions from the Fund paid
                                               in cash. Shareholders whose Common Shares are held in
                                               the name of a broker or nominee should contact the
                                               broker or nominee to confirm that the dividend
                                               reinvestment service is available. See 'Dividends and
                                               Distributions' and 'Taxation.'

CUSTODIAN, TRANSFER AGENT, DIVIDEND
  DISBURSING AGENT AND REGISTRAR.............  State Street Bank and Trust Company will act as
                                               custodian, and EquiServe Trust Company, NA will act
                                               as transfer agent, dividend disbursing agent and
                                               registrar for the Fund. See 'Custodian, Transfer
                                               Agent, Dividend Disbursing Agent and Registrar.'
</Table>

                                       21







<Page>
                            SUMMARY OF FUND EXPENSES

    The purpose of the following table is to help you understand the fees and
expenses that you, as a Common Shareholder, would bear directly or indirectly.
The expenses shown in the table are based on estimated amounts for the Fund's
first year of operations, unless otherwise indicated, and assume that the Fund
issues approximately          Common Shares. If the Fund issues fewer Common
Shares, all other things being equal, these expenses would increase. See
'Management of the Fund.' The expenses in the table also assume the issuance of
Fund Preferred Shares in an amount equal to 33 1/3% of the Fund's total capital
(after issuance), and the table shows Fund expenses both as a percentage of net
assets attributable to Common Shares, and, in footnote 4, as a percentage of net
assets attributable to Common Shares assuming no leverage.

<Table>
<Caption>
SHAREHOLDER TRANSACTION EXPENSES
<S>                                                           <C>
    Sales Load Paid by You (as a percentage of offering
      price)................................................            4.5%
    Expenses Borne by the Fund (as a percentage of offering
      price)................................................            0.2%(1)(2)
    Dividend Reinvestment Plan Fees.........................            None
</Table>

<Table>
<Caption>
                                                                 PERCENTAGE OF NET
                                                                ASSETS ATTRIBUTABLE
                                                                 TO COMMON SHARES
                                                              (ASSUMES FUND PREFERRED
                                                               SHARES ARE ISSUED)(4)
                                                               ---------------------
<S>                                                           <C>
ANNUAL EXPENSES
    Investment Management Fees (3)..........................               %
    Other Expenses (3)......................................               %
    Interest Payments on Borrowed Funds (3).................            None
                                                                       -----
    Total Annual Fund Operating Expenses (3)................               %
                                                                       -----
                                                                       -----
</Table>

- ---------

(1) The Investment Manager has also agreed to pay all organizational expenses
    and offering costs (other than the sales load) that exceed $.03 per Common
    Share (.20% of the offering price).

(2) If the Fund offers Fund Preferred Shares, costs of that offering, estimated
    to be slightly more than 1% of the total amount of the Fund Preferred Share
    offering, will be borne immediately by Common Shareholders and result in the
    reduction of the net asset value of the Common Shares. Assuming the issuance
    of Fund Preferred Shares in an amount equal to 33 1/3% of the Fund's total
    capital (after issuance), those offering costs are estimated to be no more
    than approximately $ or $0. per Common Share (.% of the offering price).

(3) In the event the Fund, as an alternative to issuing Fund Preferred Shares,
    utilizes leverage by borrowing in an amount equal to approximately 33 1/3%
    of the Fund's total assets (including the amount obtained from leverage), it
    is estimated that, as a percentage of net assets attributable to Common
    Shares, the Investment Management Fee would be    %, Other Expenses would be
       %, Interest Payments on Borrowed Funds (assuming an interest rate of
       %, which interest rate is subject to change based on prevailing market
    conditions) would be    %, Total Annual Fund Operating Expenses would be
       % and Total Net Annual Expenses would be    %.

(4) If the Fund does not issue Fund Preferred Shares or otherwise use leverage,
    the Fund's expenses would be estimated to be as follows:

                                              (footnotes continued on next page)

                                       22




<Page>
(footnotes continued from previous page)

<Table>
<Caption>
                                                                 PERCENTAGE OF NET
                                                              ASSETS ATTRIBUTABLE TO
                                                                   COMMON SHARES
                                                              (ASSUMES NO BORROWINGS
                                                               AND NO FUND PREFERRED
                                                              SHARES ARE OUTSTANDING)
                                                              -----------------------
<S>                                                           <C>
  ANNUAL EXPENSES
  Investment Management Fees................................                %
  Other Expenses............................................                %
  Interest Payments on Borrowed Funds.......................             None
  Total Annual Fund Operating Expenses......................                %
                                                                      -------
                                                                      -------
</Table>

    The following example illustrates the expenses (including the sales load of
$45, estimated offering expenses of this offering of $    and the estimated Fund
Preferred Share offering costs assuming Fund Preferred Shares are issued
representing 33 1/3% of the Fund's total capital (after issuance) of $    ) that
you would pay on a $1,000 investment in Common Shares, assuming (1) total net
annual expenses of    % of net assets attributable to Common Shares in years
1-5, increasing to   % in year 10 and (2) a 5% annual return:

<Table>
<Caption>
                                                              1 YEAR   3 YEARS   5 YEARS   10 YEARS
                                                              ------   -------   -------   --------
<S>                                                           <C>      <C>       <C>       <C>
    Total Expenses Incurred.................................   $         $        $          $
</Table>

    THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE HIGHER OR LOWER. The example assumes that the estimated
'Other Expenses' set forth in the Annual Expenses table are accurate and that
all dividends and distributions are reinvested at net asset value. Actual
expenses may be greater or less than those assumed. Moreover, the Fund's actual
rate of return may be greater or less than the hypothetical 5% return shown in
the example. The expenses you would pay, based on the Fund's expenses as stated
as percentages of the Fund's managed assets (assuming the issuance of Fund
Preferred Shares in an amount equal to 33 1/3% of the Fund's capital after their
issuance) and otherwise on the assumptions in the example would be: 1 Year $  ;
3 Years $  ; 5 Years $  ; and 10 Years $   .

                                       23







<Page>
                                    THE FUND

    Cohen & Steers REIT and Preferred Balanced Income Fund, Inc. is a recently
organized, non-diversified, closed-end management investment company. We were
organized as a Maryland corporation on March 25, 2003 and are registered as an
investment company under the Investment Company Act of 1940 (the '1940 Act'). As
a recently-organized entity, we have no operating history. Our principal office
is located at 757 Third Avenue, New York, New York 10017, and our telephone
number is (212) 832-3232.

                                USE OF PROCEEDS

    We estimate the net proceeds of this offering, after deducting (i) all
organization expenses and (ii) offering costs (other than the sales load) that
do not exceed $0.03 per share of Common Shares, to be $    , or $    assuming
exercise of the over-allotment option in full. The net proceeds will be invested
in accordance with the policies set forth under 'Investment Objectives and
Policies.' A portion of the organization and offering expenses of the Fund has
been advanced by the Investment Manager and will be repaid by the Fund upon
closing of this offering. The Investment Manager will incur and be responsible
for (i) all of the Fund's organization expenses and (ii) offering expenses
(other than the sales load) that exceed $0.03 per share of the Fund's Common
Shares.

    We estimate that the net proceeds of this offering will be fully invested in
accordance with our investment objective and policies within three to six months
of the initial public offering. Pending such investment, those proceeds may be
invested in U.S. Government securities or high-quality, short-term money market
instruments. See 'Investment Objectives and Policies.'

                       INVESTMENT OBJECTIVES AND POLICIES

GENERAL

    The Fund's primary investment objective is to seek high current income.
Capital appreciation is our secondary objective. The Fund is not intended as a
complete investment program. There can be no assurance that the Fund will
achieve its investment objectives.

    Under normal market conditions, the Fund will invest:

     at least 40% of its total assets in common stocks issued by real estate
     companies, such as 'real estate investment trusts' or 'REITs'. A real
     estate company derives at least 50% of its revenue from real estate or has
     at least 50% of its assets in real estate. A REIT is a company dedicated to
     owning, and usually operating, income producing real estate, or to
     financing real estate;

     at least 40% of its total assets in preferred securities; up to 5% of the
     Fund's total assets may be invested in preferred securities issued by
     REITs;

     up to 20% of its total assets in debt securities, including convertible
     debt securities and convertible preferred securities;

     at least 25% of its total assets in the securities of companies principally
     engaged in the financial services industry (which are prominent issuers of
     preferred securities);

     up to 20% of its total assets in U.S. dollar denominated securities of
     foreign issuers traded or listed on a U.S. securities exchange; and

                                       24




<Page>
     up to 5% of its total assets in preferred or other debt securities that at
     the time of the investment are rated below investment grade or that are
     unrated but judged to be of comparable quality by the Fund's Investment
     Manager.

    The policy of concentrating its investments in the financial services and
real estate industries makes the Fund more susceptible to adverse economic or
regulatory occurrences affecting these sectors. (See 'Principal Risks of the
Fund -- Special Risks of Securities Linked to the Real Estate Market'
and -- General Risks of Securities Linked to the Financial Services Industry').

    Although the Fund does not currently intend to invest in illiquid securities
(i.e., securities that are not readily marketable), it may invest up to 10% of
its total assets in illiquid securities. Similarly, although the Fund does not
intend to invest in convertible securities, it may invest up to 20% of its total
assets in securities convertible into common or preferred securities where the
conversion feature represents, in the Investment Manager's view, a significant
element of the securities' value. Common stock acquired pursuant to a conversion
feature will be subject to this 20% limitation.

    Under normal conditions, the Fund intends to maintain a balance between
investments in income producing common stock issued by real estate companies,
including REITs, and preferred and other debt securities. Substantially all of
the common stocks issued by real estate companies, including REITs, in which the
Fund intends to invest are traded on a national securities exchange or in the
over-the-counter market. REITs are generally not taxed on income distributed to
shareholders provided they distribute to their shareholders substantially all of
their income and otherwise comply with the requirements of the Code. As a
result, REITs generally pay relatively high dividends (as compared to other
types of companies) and the Fund intends to use these REIT dividends in an
effort to meet its objective of high current income. It is the Fund's current
intention to invest approximately 50% of its total assets in common stocks of
real estate companies, although the actual percentage of real estate common
stocks in its portfolio may change.

    With respect to the preferred securities component of the portfolio, under
current market conditions, the Fund expects that it will invest primarily in
taxable preferred securities. The Fund may also invest up to 5% of its total
assets in preferred securities issued by REITs. Under current market conditions,
the Fund's portfolio of preferred securities is expected to consist primarily
of fixed rate preferred securities.

    A security will be considered investment grade quality if it is rated 'BBB'
or higher by S&P, 'Baa' or higher by Moody's or an equivalent rating by a
nationally recognized statistical rating agency, or is unrated but judged to be
of comparable quality by the Investment Manager. Bonds of below investment grade
quality (Ba/BB or below) are commonly referred to as 'junk bonds.' Securities of
below investment grade quality are regarded as having predominantly speculative
characteristics with respect to the issuer's capacity to pay interest and repay
principal. These credit quality policies apply only at the time a security is
purchased, and the Fund is not required to dispose of a security if a rating
agency downgrades its assessment of the credit characteristics of a particular
issue. In determining whether to retain or sell a security that a rating agency
has downgraded, the Investment Manager may consider such factors as its
assessment of the credit quality of the issuer of the security, the price at
which the security could be sold and the rating, if any, assigned to the
security by other rating agencies. Appendix A to the SAI contains a general
description of Moody's, S&P's and Fitch's ratings of securities.

                                       25




<Page>
    The Fund's investment objectives and certain other policies are fundamental
and may not be changed without the approval of the holders of a 'majority of the
outstanding' Common Shares and the Fund Preferred Shares voting together as a
single class, and of the holders of a 'majority of the outstanding' Fund
Preferred Shares voting as a separate class. When used with respect to
particular shares of the Fund, a 'majority of the outstanding' shares means
(i) 67% or more of the shares present at a meeting, if the holders of more than
50% of the shares are present or represented by proxy, or (ii) more than 50% of
the shares, whichever is less. Unless otherwise indicated, the Fund's investment
policies are not fundamental and may be changed by the Board of Directors
without the approval of shareholders, although we have no current intention of
doing so.

INVESTMENT STRATEGIES

    In making investment decisions with respect to common stocks and other
equity securities issued by real estate companies, including REITs, the
Investment Manager relies on a fundamental analysis of each company. The
Investment Manager reviews each company's potential for success in light of the
company's current financial condition, its industry and sector position, and
economic and market conditions. The Investment Manager evaluates a number of
factors, including growth potential, earnings estimates and the quality of
management.

    In making investment decisions with respect to preferred securities and debt
securities, the Investment Manager seeks to select what it believes are superior
securities, (i.e., securities the Investment Manager views as undervalued on the
basis of risk and return profiles). In making these determinations, the
Investment Manager evaluates the fundamental characteristics of an issuer,
including an issuer's creditworthiness, and also takes into account prevailing
market factors. In analyzing credit quality, the Investment Manager considers
not only fundamental analysis, but also an issuer's corporate and capital
structure and the placement of the preferred or debt securities within that
structure. The Investment Manager also takes into account other factors, such as
call and other structural features, momentum and other exogenous signals (i.e.,
the likely directions of ratings) and relative value versus other income
security classes.

PORTFOLIO COMPOSITION

    Our portfolio will be composed principally of the following investments. A
more detailed description of our investment policies and restrictions and more
detailed information about our portfolio investments are contained in the SAI.

    Initial Portfolio Composition. Initially, the Fund will allocate
approximately 50% of the Fund's total assets to common stocks issued by real
estate companies, including REITs, approximately 40% to preferred securities and
approximately 10% to debt securities other than preferred securities.
Thereafter, the portion of the Fund's total assets invested in common stock
issued by real estate companies, preferred securities and other debt securities
will vary from time to time, consistent with the Fund's investment objectives,
although the Fund will normally invest at least 40% of its total assets in
common stock issued by real estate companies, including REITs, and at least 40%
of its total assets in preferred securities.

                                       26




<Page>
    Common Stocks issued by Real Estate Companies. For purposes of our
investment policies, a real estate company is one that:

     derives at least 50% of its revenues from the ownership, construction,
     financing, management or sale of commercial, industrial, or residential
     real estate; or

     has at least 50% of its assets in such real estate.

    Under normal market conditions, we will invest at least 40% of our total
assets in the common stocks of real estate companies, including REIT shares. A
REIT is a company dedicated to owning, and usually operating, income producing
real estate, or to financing real estate. REITs pool investors' funds for
investment primarily in income producing real estate or real estate-related
loans or interests. REITs are generally not taxed on income distributed to
shareholders provided, among other things, they distribute to their shareholders
substantially all of their taxable income (other than net capital gains) for
each taxable year and otherwise comply with the Fund. As a result, REITs tend to
pay relatively higher dividends than other types of companies and the Fund
intends to use these REIT dividends in an effort to meet the current income goal
of its investment objectives.

    REITs can generally be classified as Equity REITs, Mortgage REITs and Hybrid
REITs. Equity REITs, which invest the majority of their assets directly in real
property, derive their income primarily from rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments. Hybrid REITs
combine the characteristics of both Equity REITs and Mortgage REITs. The Fund
does not currently intend to invest more than 10% of its total assets in
Mortgage REITs or Hybrid REITs.

    Preferred Securities. Under normal market conditions, the Fund will invest
at least 40% of its total assets in preferred securities. There are two basic
types of preferred securities. The first, sometimes referred to in this
prospectus as traditional preferred securities, consists of preferred stock
issued by an entity taxable as a corporation. The second type is referred to in
this prospectus as hybrid-preferred securities. Hybrid-preferred securities are
usually issued by a trust or limited partnership and represent preferred
interests in deeply subordinated debt instruments issued by the corporation for
whose benefit the trust or partnership was established. Initially, the preferred
securities component of the Fund will be comprised primarily of taxable
preferred securities.

    Traditional Preferred Securities. Traditional preferred securities generally
pay fixed or adjustable rate dividends to investors and generally have a
'preference' over common stock in the payment of dividends and the liquidation
of a company's assets. This means that a company must pay dividends on preferred
stock before paying any dividends on its common stock. In order to be payable,
distributions on such preferred securities must be declared by the issuer's
board of directors. Income payments on typical preferred securities currently
outstanding are cumulative, causing dividends and distributions to accumulate
even if not declared by the board of directors or otherwise made payable. In
such a case all accumulated dividends must be paid before any dividend on the
common stock can be paid. However, some traditional preferred stocks are non-
cumulative, in which case dividends do not accumulate and need not ever be paid.
A portion of the portfolio may include investments in non-cumulative preferred
securities, whereby the issuer does not have an obligation to make up any
arrearages to its shareholders. Should an issuer of a non-cumulative preferred
stock held by the Fund determine not to pay dividends on such stock,

                                       27




<Page>
the amount of dividends the Fund pays may be adversely affected. There is no
assurance that dividends or distributions on the traditional preferred
securities in which the Fund invests will be declared or otherwise made payable.
Preferred stockholders usually have no right to vote for corporate directors or
on other matters. Shares of traditional preferred securities have a liquidation
value that generally equals the original purchase price at the date of issuance.
The market value of preferred securities may be affected by favorable and
unfavorable changes impacting companies in the utilities and financial services
sectors, which are prominent issuers of preferred securities, and by actual and
anticipated changes in tax laws, such as changes in corporate income tax rates.
Because the claim on an issuer's earnings represented by traditional preferred
securities may become onerous when interest rates fall below the rate payable on
such securities, the issuer may redeem the securities. Thus, in declining
interest rate environments in particular, the Fund's holdings of higher
rate-paying fixed rate preferred securities may be reduced and the Fund would be
unable to acquire securities of comparable credit quality paying comparable
rates with the redemption proceeds.

    Pursuant to the DRD, corporations may generally deduct 70% of the income
they receive from dividends on traditional preferred securities that are paid
out of earnings and profits of the issuer. Corporate shareholders of a regulated
investment company like the Fund generally are permitted to claim a deduction
with respect to that portion of their distributions attributable to amounts
received by the regulated investment company that qualify for the DRD. However,
not all traditional preferred securities pay dividends that are eligible for the
DRD, including preferred securities issued by REITs described below. Under
current market conditions, it is expected that few, if any, of the preferred
securities in which the Fund intends to invest will qualify for the DRD.

    Within the category of traditional preferred securities, the Fund may invest
up to 5% of its total assets in traditional preferred securities issued by real
estate companies, including REITs. REIT preferred securities are generally
perpetual in nature, although REITs often have the ability to redeem the
preferred securities after a specified period of time. The market value of REIT
preferred securities may be affected by favorable and unfavorable changes
impacting a particular REIT. While sharing characteristics that make them
similar to traditional preferred securities, dividends from REIT preferred
securities do not provide any DRD benefit.

    Hybrid-Preferred Securities. Hybrid-preferred securities are a comparatively
new asset class. Hybrid-preferred securities are typically issued by
corporations, generally in the form of interest-bearing notes with preferred
securities characteristics, or by an affiliated business trust of a corporation,
generally in the form of beneficial interests in subordinated debentures or
similarly structured securities. The hybrid-preferred securities market consists
of both fixed and adjustable coupon rate securities that are either perpetual in
nature or have stated maturity dates.

    Hybrid-preferred securities are typically junior and fully subordinated
liabilities of an issuer or the beneficiary of a guarantee that is junior and
fully subordinated to the other liabilities of the guarantor. In addition,
hybrid-preferred securities typically permit an issuer to defer the payment of
income for eighteen months or more without triggering an event of default.
Generally, the maximum deferral period is five years. Because of their
subordinated position in the capital structure of an issuer, the ability to
defer payments for extended periods of time without default consequences to the
issuer, and certain other features (such as restrictions on common dividend
payments by the issuer or ultimate guarantor when full cumulative payments on
the trust preferred securities have not been made), these hybrid-preferred
securities are often treated as close substitutes for traditional preferred
securities, both by issuers and investors. Hybrid-preferred securities have many
of the key characteristics of equity due to their subordinated position in an

                                       28




<Page>
issuer's capital structure and because their quality and value are heavily
dependent on the profitability of the issuer rather than on any legal claims to
specific assets or cash flows. Hybrid preferred securities include but are not
limited to trust originated preferred securities ('TOPRS'r'); monthly income
preferred securities ('MIPS'r'); quarterly income bond securities ('QUIBS'r');
quarterly income debt securities ('QUIDS'r'); quarterly income preferred
securities ('QUIPS(SM)'); corporate trust securities ('CORTS'r'); public income
notes ('PINES'r'); and other hybrid-preferred securities.*

    Hybrid-preferred securities are typically issued with a final maturity date,
although some are perpetual in nature. In certain instances, a final maturity
date may be extended and/or the final payment of principal may be deferred at
the issuer's option for a specified time without default. No redemption can
typically take place unless all cumulative payment obligations have been met,
although issuers may be able to engage in open-market repurchases without regard
to whether all payments have been paid.

    Many hybrid-preferred securities are issued by trusts or other special
purpose entities established by operating companies and are not a direct
obligation of an operating company. At the time the trust or special purpose
entity sells such preferred securities to investors, it purchases debt of the
operating company (with terms comparable to those of the trust or special
purpose entity securities), which enables the operating company to deduct for
tax purposes the interest paid on the debt held by the trust or special purpose
entity. The trust or special purpose entity is generally required to be treated
as transparent for Federal income tax purposes such that the holders of the
trust preferred securities are treated as owning beneficial interests in the
underlying debt of the operating company. Accordingly, payments on the
hybrid-preferred securities are treated as interest rather than dividends for
Federal income tax purposes and, as such, are not eligible for the DRD. The
trust or special purpose entity in turn would be a holder of the operating
company's debt and would have priority with respect to the operating company's
earnings and profits over the operating company's common shareholders, but
would typically be subordinated to other classes of the operating company's
debt. Typically a preferred share has a rating that is slightly below that of
its corresponding operating company's senior debt securities.

    Within the category of hybrid-preferred securities are senior debt
instruments that trade in the broader preferred securities market. These debt
instruments, which are sources of long-term capital for the issuers, have
structural features similar to preferred stock such as maturities ranging from
30 years to perpetuity, call features, exchange listings and the inclusion of
accrued interest in the trading price. Similar to other hybrid-preferred
securities, these debt instruments usually do not offer equity capital
treatment. CORTS'r' and PINES'r' are two examples of senior debt instruments
which are structured and trade as hybrid-preferred securities.

    Financial Services Company Securities. The Fund intends to invest at least
25% of its total assets in securities issued by companies 'principally engaged'
in the financial services industry (which are prominent issuers of preferred
securities). A company is 'principally engaged' in financial services if it
derives at least 50% of its consolidated revenues from providing financial

- ---------
* TOPRS is a registered service mark owned by Merrill Lynch & Co., Inc. MIPS and
  QUIDS are registered service marks and QUIPS is a service mark owned by
  Goldman, Sachs & Co. QUIBS is a registered service mark owned by Morgan
  Stanley. CORTS and PINES are registered service marks owned by Salomon Smith
  Barney Inc.

                                       29




<Page>
services. Companies in the financial services sector include commercial banks,
industrial banks, savings institutions, finance companies, diversified financial
services companies, investment banking firms, securities brokerage houses,
investment advisory companies, leasing companies, insurance companies and
companies providing similar services.

    Foreign Securities. The Fund may invest up to 20% of its total assets in
U.S. dollar denominated securities of non-U.S. issuers traded or listed on a
U.S. securities exchange. The Fund may invest in any region of the world and
invests in companies operating in developed countries such as Canada, Japan,
Australia, New Zealand and most Western European countries. The Fund does not
intend to invest in companies based in emerging markets such as the Far East,
Latin America and Eastern Europe. The World Bank and other international
agencies define emerging markets based on such factors as trade initiatives,
per capita income and level of industrialization. For purposes of this 20%
limitation, non-U.S. securities include securities represented by American
Depository Receipts.

    Debt Securities. The Fund may invest up to 20% of its total assets in debt
securities, including convertible debt securities and convertible preferred
securities. Convertible securities are debt securities or preferred stock that
are exchangeable for common stock of the issuer at a predetermined price (the
'conversion price'). Depending upon the relationship of the conversion price to
the market value of the underlying securities, convertible securities may trade
more like common stock than debt instruments. Common stock acquired pursuant to
a conversion feature will be subject to this 20% limitation. As a result of
conversion, the Fund may hold common stocks issued by companies other than real
estate companies, such holdings not normally to exceed 5% of total assets. In
addition, keeping with the income objective of the Fund, the Fund expects to
sell any common stock holdings of issuers other than real estate companies as
soon as practicable after conversion of a convertible security. The Fund's
investments in debt securities may include investments in U.S. dollar
denominated corporate debt securities issued by domestic and non-U.S.
corporations (subject to the requirements noted above) and U.S. dollar
denominated government debt securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities or a non-U.S. Government or its
agencies or instrumentalities (subject to the requirements noted above).

    Lower-Rated Securities. The Fund may invest up to 5% (measured at the time
of purchase) of its total assets in securities rated below investment grade.
These lower grade securities are commonly known as 'junk bonds.' Securities
rated below investment grade are judged to have speculative characteristics
with respect to their interest and principal payments. Such securities may
face major ongoing uncertainties or exposure to adverse business, financial
or economic conditions which could lead to inadequate capacity to meet timely
interest and principal payments. Lower grade securities, though high yielding,
are characterized by high risk. They may be subject to certain risks with
respect to the issuing entity and to greater market fluctuations than certain
lower yielding, higher rated securities. The retail secondary market for
lower grade securities may be less liquid than that of higher rated securities;
adverse conditions could make it difficult at times for the Fund to sell
certain of these securities or could result in lower prices than those
used in calculating the Fund's net asset value. Preferred stock or debt
securities will be considered to be investment grade if, at the time of
investment, such security has a rating of "BBB" or higher by S&P, "Baa" or
higher by Moody's or an equivalent rating by a nationally recognized
statistical rating agency, or, if unrated, such security is determined
by the Investment Manager to be of comparable quality.

                                       30




<Page>
    Common Stocks. The Fund will invest at least 40%, and may invest up to 60%,
of its total assets in common stocks issued by real estate companies. Common
stocks represent the residual ownership interest in the issuer and holders of
common stock are entitled to the income and increase in the value of the assets
and business of the issuer after all of its debt obligations and obligations to
preferred stockholders are satisfied. Common stocks generally have voting
rights. Common stocks fluctuate in price in response to many factors including
historical and prospective earnings of the issuer, the value of its assets,
general economic conditions, interest rates, investor perceptions and market
liquidity.

    Illiquid Securities. While the Fund does not currently intend to invest in
illiquid securities (i.e., securities that are not readily marketable), it may
invest up to 10% of its total assets in illiquid securities. For this purpose,
illiquid securities include, but are not limited to, restricted securities
(securities the disposition of which is restricted under the Federal securities
laws), securities that may only be resold pursuant to Rule 144A under the
Securities Act of 1933, as amended (the 'Securities Act') but that are deemed to
be illiquid, and repurchase agreements with maturities in excess of seven days.
The Board of Directors or its delegate has the ultimate authority to determine,
to the extent permissible under the Federal securities laws, which securities
are liquid or illiquid for purposes of this 10% limitation. The Board of
Directors has delegated to the Investment Manager the day-to-day determination
of the illiquidity of any security held by the Fund, although it has retained
oversight and ultimate responsibility for such determinations. Although no
definitive liquidity criteria are used, the Board and/or the Investment Manager
will consider factors such as (i) the nature of the market for a security
(including the institutional private resale market; the frequency of trades and
quotes for the security; the number of dealers willing to purchase or sell the
security; the amount of time normally needed to dispose of the security; and the
method of soliciting offers and the mechanics of transfer), (ii) the terms of
certain securities or other instruments allowing for the disposition to a third
party or the issuer thereof (e.g., certain repurchase obligations and demand
instruments), and (iii) other permissible relevant factors.

    Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than that which prevailed when it decided to
sell. Illiquid securities will be priced at fair value as determined in good
faith by the Board of Directors or its delegate. If, through changes in the
market value of its portfolio securities, the Fund should be in a position where
more than 10% of the value of its total assets is invested in illiquid
securities, including restricted securities that are not readily marketable, the
Fund will take such steps as the Board and/or the Investment Manager deem
advisable, if any, to protect liquidity.

    When-Issued and Delayed Delivery Transactions. The Fund may buy and sell
securities on a when-issued or delayed delivery basis, making payment or taking
delivery at a later date, normally within 15 to 45 days of the trade date. This
type of transaction may involve an element of risk because no interest accrues
on the securities prior to settlement and, because securities are subject to
market fluctuations, the value of the securities at time of delivery may be less
(or more) than cost. A separate account of the Fund will be established with its
custodian consisting of cash

                                       31




<Page>
equivalents or liquid securities having a market value at all times at least
equal to the amount of the commitment.

    Portfolio Turnover. The Fund may engage in portfolio trading when considered
appropriate, but short-term trading will not be used as the primary means of
achieving the Fund's investment objectives. However, there are no limits on the
rate of portfolio turnover, and investments may be sold without regard to length
of time held when, in the opinion of the Investment Manager, investment
considerations warrant such action. A higher portfolio turnover rate results in
correspondingly greater brokerage commissions and other transactional expenses
that are borne by the Fund. High portfolio turnover may result in the
realization of net short-term capital gains by the Fund which, when distributed
to shareholders, will be taxable as ordinary income.

    Defensive Position. When the Investment Manager believes that market or
general economic conditions justify a temporary defensive position, we may
deviate from our investment objectives and invest all or any portion of our
assets in investment grade debt securities, without regard to whether the issuer
is a real estate company or financial services company. When and to the extent
we assume a temporary defensive position, we may not pursue or achieve our
investment objectives.

OTHER INVESTMENTS

    The Fund's cash reserves, held to provide sufficient flexibility to take
advantage of new opportunities for investments and for other cash needs, will be
invested in money market instruments. Money market instruments in which we may
invest our cash reserves will generally consist of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and such
obligations which are subject to repurchase agreements and commercial paper. See
'Investment Objectives and Policies' in the SAI.

                                USE OF LEVERAGE

    Fund Preferred Shares. Subject to market conditions and the Fund's receipt
of AAA/aaa credit rating on the Fund Preferred Shares, approximately one to
three months after the completion of the offering of the Common Shares, the Fund
intends to offer Fund Preferred Shares representing approximately 33 1/3% of the
Fund's capital immediately after their issuance. The issuance of Fund Preferred
Shares will leverage your investment in the Common Shares. As an alternative to
the Fund Preferred Shares, the Fund may leverage through borrowings. The Fund
Preferred Shares and any borrowings will have seniority over the Common Shares.

    Changes in the value of the Fund's investment portfolio, including
securities bought with the proceeds of the leverage, will be borne entirely by
the holders of Common Shares. If there is a net decrease, or increase, in the
value of the Fund's investment portfolio, the leverage will decrease, or
increase (as the case may be), the net asset value per Common Share to a greater
extent than if the Fund were not leveraged. During periods in which the Fund is
using leverage, the fees paid to the Investment Manager for advisory services
will be higher than if the Fund did not use leverage because the fees paid will
be calculated on the basis of the Fund's managed assets, including the proceeds
from the issuance of Fund Preferred Shares and other leverage. Leverage involves
greater risks. The Fund's leveraging strategy may not be successful.

    Borrowings may be made by the Fund through reverse repurchase agreements
under which the Fund sells portfolio securities to financial institutions such
as banks and broker-dealers and

                                       32




<Page>
agrees to repurchase them at a particular date and price. Such agreements are
considered to be borrowings under the Investment Company Act. The Fund may
utilize reverse repurchase agreements when it is anticipated that the interest
income to be earned from the investment of the proceeds of the transaction is
greater than the interest expense of the transaction.

    Borrowings may also be made by the Fund through dollar roll transactions. A
dollar roll transaction involves a sale by the Fund of a mortgage-backed or
other security concurrently with an agreement by the Fund to repurchase a
similar security at a later date at an agreed-upon price. The securities that
are repurchased will bear the same interest rate and stated maturity as those
sold, but pools of mortgages collateralizing those securities may have different
prepayment histories than those sold. During the period between the sale and
repurchase, the Fund will not be entitled to receive interest and principal
payments on the securities sold. Proceeds of the sale will be invested in
additional instruments for the Fund, and the income from these investments will
generate income for the Fund. If such income does not exceed the income, capital
appreciation and gain or loss that would have been realized on the securities
sold as part of the dollar roll, the use of this technique will diminish the
investment performance of the Fund compared with what the performance would have
been without the use of dollar rolls.

    Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless immediately after the issuance the value of the Fund's total assets is at
least 200% of the liquidation value of the outstanding preferred shares (i.e.,
such liquidation value may not exceed 50% of the Fund's total assets less
liabilities other than borrowing). In addition, the Fund is not permitted to
declare any cash dividend or other distribution on its Common Shares unless, at
the time of such declaration, the value of the Fund's total assets less
liabilities other than borrowing is at least 200% of such liquidation value. If
Fund Preferred Shares are issued, the Fund intends, to the extent possible, to
purchase or redeem Fund Preferred Shares from time to time to the extent
necessary in order to maintain coverage of any Fund Preferred Shares of at least
200%. If the Fund has Fund Preferred Shares outstanding, two of the Fund's
Directors will be elected by the holders of Fund Preferred Shares, voting
separately as a class. The remaining Directors of the Fund will be elected by
holders of Common Shares and Fund Preferred Shares voting together as a single
class. In the event the Fund failed to pay dividends on Fund Preferred Shares
for two years, Fund Preferred Shareholders would be entitled to elect a majority
of the Directors of the Fund. The failure to pay dividends or make distributions
could result in the Fund ceasing to qualify as a regulated investment company
under the Code, which could have a material adverse effect on the value of the
Common Shares. See 'Description of Shares -- Fund Preferred Shares.'

    Under the 1940 Act, the Fund generally is not permitted to borrow unless
immediately after the borrowing the value of the Fund's total assets less
liabilities other than the borrowing is at least 300% of the principal amount of
such borrowing (i.e., such principal amount may not exceed 33 1/3% of the Fund's
total assets). In addition, the Fund is not permitted to declare any cash
dividend or other distribution on its Common Shares unless, at the time of such
declaration, the value of the Fund's total assets, less liabilities other than
the borrowings, is at least 300% of such principal amount. If the Fund borrows,
the Fund intends, to the extent possible, to prepay all or a portion of the
principal amount of the borrowing to the extent necessary in order to maintain
the required asset coverage. Failure to maintain certain asset coverage
requirements could result in an event of default and entitle the debt holders to
elect a majority of the board of directors.

    The Fund may be subject to certain restrictions imposed by either guidelines
of one or more rating agencies which may issue ratings for Fund Preferred Shares
or, if the Fund borrows from a

                                       33




<Page>
lender, by the lender. These guidelines may impose asset coverage or portfolio
composition requirements that are more stringent than those imposed on the Fund
by the 1940 Act. It is not anticipated that these covenants or guidelines will
impede the Investment Manager from managing the Fund's portfolio in accordance
with the Fund's investment objectives and policies. In addition to other
considerations, to the extent that the Fund believes that the covenants and
guidelines required by the rating agencies would impede its ability to meet its
investment objectives, or if the Fund is unable to obtain the rating on the Fund
Preferred Shares (expected to be AAA/aaa), the Fund will not issue the Fund
Preferred Shares.

    Assuming that the Fund Preferred Shares or borrowings will represent
approximately 33 1/3% of the Fund's capital and pay dividends or interest or
payment rate set by an interest rate transaction at an annual average rate of
   %, the income generated by the Fund's portfolio (net of estimated expenses)
must exceed    % in order to cover such dividend payments or interest or payment
rates and other expenses specifically related to the Fund Preferred Shares or
borrowings. Of course, these numbers are merely estimates, used for
illustration. Actual Fund Preferred Share dividend rates, interest, or payment
rates may vary frequently and may be significantly higher or lower than the rate
estimated above.

    The following table is furnished in response to requirements of the
Securities and Exchange Commission. It is designed to illustrate the effect of
leverage on Common Share total return, assuming investment portfolio total
returns (comprised of income and changes in the value of investments held in the
Fund's portfolio) of  - 10%,  - 5%, 0%, 5% and 10%. These assumed investment
portfolio returns are hypothetical figures and are not necessarily indicative of
the investment portfolio returns expected to be experienced by the Fund. The
table further reflects the issuance of Fund Preferred Shares or borrowings
representing 33 1/3% of the Fund's total capital, a    % yield on the Fund's
investment portfolio, net of expenses, and the Fund's currently projected annual
Fund Preferred Share dividend rate, borrowing interest rate or payment rate set
by an interest rate transaction of    %. See 'Use of Leverage -- Leverage
Risks.'

<Table>
<S>                                       <C>        <C>        <C>     <C>       <C>
Assumed Portfolio Total Return..........     (10)%       (5)%       0 %     5%       10%
Common Share Total Return...............         %          %         %       %         %
</Table>

    Common Share total return is composed of two elements -- the Common Share
dividends paid by the Fund (the amount of which is largely determined by the net
investment income of the Fund after paying dividends on Fund Preferred Shares or
interest on borrowings) and gains or losses on the value of the securities the
Fund owns. As required by Securities and Exchange Commission rules, the table
assumes that the Fund is more likely to suffer capital losses than to enjoy
capital appreciation.

    During the time in which the Fund is utilizing leverage, the fees paid to
the Investment Manager for investment advisory and management services will be
higher than if the Fund did not utilize leverage because the fees paid will be
calculated based on the Fund's managed assets. Only the Fund's Common
Shareholders bear the cost of the Fund's fees and expenses, including the costs
associated with any offering of Fund Preferred Shares (estimated to be slightly
more than 1% of the total amount of the Fund Preferred Share offering) which
will be borne immediately by Common Shareholders, and the costs associated with
any borrowing. See 'Summary of Fund Expenses.'

                                       34




<Page>
    The Fund may also borrow money as a temporary measure for extraordinary or
emergency purposes, including the payment of dividends and the settlement of
securities transactions which otherwise might require untimely dispositions of
Fund securities.

LEVERAGE RISKS

    Utilization of leverage is a speculative investment technique and involves
certain risks to the holders of Common Shares. These include the possibility of
higher volatility of the net asset value of the Common Shares and potentially
more volatility in the market value of the Common Shares. So long as the Fund is
able to realize a higher net return on its investment portfolio than the then
current cost of any leverage together with other related expenses, the effect of
the leverage will be to cause holders of Common Shares to realize higher current
net investment income than if the Fund were not so leveraged. On the other hand,
to the extent that the then current cost of any leverage, together with other
related expenses, approaches the net return on the Fund's investment portfolio,
the benefit of leverage to holders of Common Shares will be reduced, and if the
then current cost of any leverage were to exceed the net return on the Fund's
portfolio, the Fund's leveraged capital structure would result in a lower rate
of return to Common Shareholders than if the Fund were not so leveraged.

    Any decline in the net asset value of the Fund's investments will be borne
entirely by Common Shareholders. Therefore, if the market value of the Fund's
portfolio declines, the leverage will result in a greater decrease in net asset
value to Common Shareholders than if the Fund were not leveraged. Such greater
net asset value decrease will also tend to cause a greater decline in the market
price for the Common Shares. To the extent that the Fund is required or elects
to redeem any Fund Preferred Shares or prepay any borrowings, the Fund may need
to liquidate investments to fund such redemptions or prepayments. Liquidation at
times of adverse economic conditions may result in capital loss and reduce
returns to Common Shareholders.

    In addition, such redemption or prepayment would likely result in the Fund
seeking to terminate early all or a portion of any swap or cap transaction.
Early termination of the swap could result in a termination payment by or to the
Fund. Early termination of a cap could result in a termination payment to the
Fund. See 'Interest Rate Transactions.'

    Unless and until Fund Preferred Shares are issued or borrowings for leverage
are made, the Common Shares will not be leveraged and the disclosure regarding
these strategies will not apply.

                           INTEREST RATE TRANSACTIONS

    In order to reduce the interest rate risk inherent in our underlying
investments and capital structure, we may enter into interest rate swap or cap
transactions. Interest rate swaps involve the Fund's agreement with the swap
counterparty to pay a fixed rate payment in exchange for the counterparty paying
the Fund a variable rate payment that is intended to approximate the Fund's
variable rate payment obligation on the Fund Preferred Shares or any variable
rate borrowing. The payment obligation would be based on the notional amount of
the swap. We may use an interest rate cap, which would require us to pay a
premium to the cap counterparty and would entitle us, to the extent that a
specified variable rate index exceeds a predetermined fixed rate, to receive
from the counterparty payment of the difference based on the notional amount of
such cap. We would use interest rate swaps or caps only with the intent to
reduce or eliminate the risk that an

                                       35




<Page>
increase in short-term interest rates could have on the performance of the
Fund's Common Shares as a result of leverage.

    The use of interest rate swaps and caps is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio security transactions. Depending on the state of
interest rates in general, our use of interest rate swaps or caps could enhance
or harm the overall performance of the Fund's Common Shares. To the extent there
is a decline in interest rates, the value of the interest rate swap or cap could
decline, and could result in a decline in the net asset value of the Common
Shares. In addition, if short-term interest rates are lower than our rate of
payment on the interest rate swap, this will reduce the performance of the
Fund's Common Shares. If, on the other hand, short-term interest rates are
higher than our rate of payment on the interest rate swap, this will enhance the
performance of the Fund's Common Shares. Buying interest rate caps could enhance
the performance of the Fund's Common Shares by providing a maximum leverage
expense. Buying interest rate caps could also decrease the net income of the
Fund's Common Shares in the event that the premium paid by the Fund to the
counterparty exceeds the additional amount the Fund would have been required to
pay had it not entered into the cap agreement. The Fund has no current intention
of selling an interest rate swap or cap. We would not enter into interest rate
swap or cap transactions in an aggregate notional amount that exceeds the
outstanding amount of the Fund's leverage.

    Interest rate swaps and caps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with respect
to interest rate swaps is limited to the net amount of interest payments that
the Fund is contractually obligated to make. If the counter-party defaults, the
Fund would not be able to use the anticipated net receipts under the swap or cap
to offset the dividend payments on the Fund Preferred Shares or rate of interest
on borrowings. Depending on whether the Fund would be entitled to receive net
payments from the counterparty on the swap or cap, which in turn would depend on
the general state of short-term interest rates at that point in time, such
default could negatively impact the performance of the Fund's Common Shares.
Although this will not guarantee that the counterparty does not default, the
Fund will not enter into an interest rate swap or cap transaction with any
counterparty that the Investment Manager believes does not have the financial
resources to honor its obligation under the interest rate swap or cap
transaction. Further, the Investment Manager will continually monitor the
financial stability of a counterparty to an interest rate swap or cap
transaction in an effort to proactively protect the Fund's investments. In
addition, at the time an interest rate swap or cap transaction reaches its
scheduled termination date, there is a risk that the Fund will not be able to
obtain a replacement transaction or that the terms of the replacement will not
be as favorable as on the expiring transaction. If this occurs, it could have a
negative impact on the performance of the Fund's Common Shares.

    The Fund will usually enter into swaps or caps on a net basis; that is, the
two payment streams will be netted out in a cash settlement on the payment date
or dates specified in the instrument, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. The Fund intends to
maintain in a segregated account with its custodian cash or liquid securities
having a value at least equal to the Fund's net payment obligations under any
swap transaction, marked to market daily.

    The Fund may choose or be required to redeem some or all of the Fund
Preferred Shares or prepay any borrowings. This redemption or prepayment would
likely result in the Fund seeking to terminate early all or a portion of any
swap or cap transaction. Such early termination of a swap

                                       36




<Page>
could result in termination payment by or to the Fund. An early termination of a
cap could result in a termination payment to the Fund.

                          PRINCIPAL RISKS OF THE FUND

    We are a non-diversified, closed-end management investment company designed
primarily as a long-term investment and not as a trading vehicle. The Fund is
not intended to be a complete investment program and, due to the uncertainty
inherent in all investments, there can be no assurance that we will achieve our
investment objectives.

NO OPERATING HISTORY

    We are a newly organized non-diversified closed-end management investment
company with no operating history.

STOCK MARKET RISK

    Your investment in Common Shares represents an indirect investment in the
common stock, preferred securities and other securities owned by the Fund,
substantially all of which are traded on a national securities exchange or in
the over-the-counter markets. The value of these securities, like other stock
market investments, may move up or down, sometimes rapidly and unpredictably.
Your Common Shares at any point in time may be worth less than what you
invested, even after taking into account the reinvestment of Fund dividends and
distributions. The Fund may utilize leverage, which magnifies the stock market
risk. See 'Use of Leverage -- Leverage Risks.'

INTEREST RATE RISK

    Interest rate risk is the risk that fixed-income securities such as
preferred and debt securities will decline in value because of changes in market
interest rates. When market interest rates rise, the market value of such
securities generally will fall. The Fund's investment in such securities means
that the net asset value and market price of common shares may tend to decline
if market interest rates rise.

    During periods of declining interest rates, the issuer of a security may
exercise its option to prepay principal earlier than scheduled which is
generally known as call or prepayment risk. If this occurs, the Fund may be
forced to reinvest in lower yielding securities. This is known as reinvestment
risk. Preferred and debt securities frequently have call features that allow the
issuer to repurchase the security prior to its stated maturity. An issuer may
redeem an obligation if the issuer can refinance the debt at a lower cost due to
declining interest rates or an improvement in the credit standing of the issuer.
During periods of rising interest rates, the average life of certain types of
securities may be extended because of slower than expected principal payments.
This may lock in a below market interest rate, increase the security's duration
and reduce the value of the security. This is known as extension risk. Market
interest rates for investment grade fixed-income securities in which the Fund
will primarily invest have recently declined significantly below the recent
historical average rates for such securities. This decline may have increased
the risk that these rates will rise in the future (which would cause the value
of the Fund's net assets to decline) and the degree to which asset values may
decline in such events; however, historical interest rate levels are not
necessarily predictive of future interest rate levels.

                                       37




<Page>
CREDIT RISK AND LOWER-RATED SECURITIES RISK

    Credit risk is the risk that a preferred or debt security in the Fund's
portfolio will decline in price or fail to make dividend, interest or principal,
payments when due because the issuer of the security experiences a decline in
its financial status. Preferred securities are subordinated to bonds and other
debt instruments in a company's capital structure, in terms of priority to
corporate income, and therefore will be subject to greater credit risk than debt
instruments. The Fund may invest no more than 5% (measured at the time of
purchase) of its total assets in preferred or other debt securities that are
rated below investment grade. Securities rated below investment grade are
regarded as having predominately speculative characteristics with respect to the
issuer's capacity to pay interest and repay principal, and these bonds are
commonly referred to as 'junk bonds.' These securities are subject to a greater
risk of default. The prices of these lower grade securities are more sensitive
to negative developments, such as a decline in the issuer's revenues or a
general economic downturn, than are the prices of higher grade securities. Lower
grade securities tend to be less liquid than investment grade securities. The
market values of lower grade securities tend to be more volatile than investment
grade securities. Preferred stock or debt securities will be considered to be
investment grade if, at the time of investment, such security has a rating of
"BBB" or higher by S&P, "Baa" or higher by Moody's or an equivalent rating by a
nationally recognized statistical rating agency, or, if unrated, such security
is determined by the Investment Manager to be of comparable quality.

    Lower-rated securities may be considered speculative with respect to the
issuer's continuing ability to make principal and interest payments. Analysis of
the creditworthiness of issuers of lower-rated securities may be more complex
than for issuers of higher quality debt securities, and our ability to achieve
our investment objectives may, to the extent we are invested in lower-rated
securities, be more dependent upon such creditworthiness analysis than would be
the case if we were investing in higher quality securities. An issuer of these
securities has a currently identifiable vulnerability to default and the issuer
may be in default or there may be present elements of danger with respect to
principal or interest. We will not invest in securities which are in default
at the time of purchase.

SPECIAL RISKS OF SECURITIES LINKED TO THE REAL ESTATE MARKET

    At least 40% of the Fund's total assets will be concentrated in common stock
of real estate companies. The Fund will not invest in real estate directly, but
only in securities issued by real estate companies and REITs. However, because
of the Fund's policy of concentration in the securities of companies in the real
estate industry, the Fund is also subject to the risks associated with the
direct ownership of real estate. These risks include:

     declines in the value of real estate

     risks related to general and local economic conditions

     possible lack of availability of mortgage funds

     overbuilding

     extended vacancies of properties

     increased competition

     increases in property taxes and operating expenses

     changes in zoning laws

                                       38




<Page>
     losses due to costs resulting from the clean-up of environmental problems

     liability to third parties for damages resulting from environmental
     problems

     casualty or condemnation losses

     limitations on rents

     changes in neighborhood values and the appeal of properties to tenants

     changes in interest rates

    Thus, the value of the Common Shares may change at different rates compared
to the value of shares of a registered investment company with investments in a
mix of different industries and will depend on the general condition of the
economy. An economic downturn could have a material adverse effect on the real
estate markets and on real estate companies in which the Fund invests, which in
turn could result in the Fund not achieving its investment objectives.

    General Real Estate Risks. Real property investments are subject to varying
degrees of risk. The yields available from investments in real estate depend on
the amount of income and capital appreciation generated by the related
properties. Income and real estate values may also be adversely affected by such
factors as applicable laws (e.g., Americans with Disabilities Act and tax laws),
interest rate levels, and the availability of financing. If the properties do
not generate sufficient income to meet operating expenses, including, where
applicable, debt service, ground lease payments, tenant improvements,
third-party leasing commissions and other capital expenditures, the income and
ability of the real estate company to make payments of any interest and
principal on its debt securities will be adversely affected. In addition, real
property may be subject to the quality of credit extended and defaults by
borrowers and tenants. The performance of the economy in each of the regions in
which the real estate owned by the portfolio company is located affects
occupancy, market rental rates and expenses and, consequently, has an impact on
the income from such properties and their underlying values. The financial
results of major local employers also may have an impact on the cash flow and
value of certain properties. In addition, real estate investments are relatively
illiquid and, therefore, the ability of real estate companies to vary their
portfolios promptly in response to changes in economic or other conditions is
limited. A real estate company may also have joint venture investments in
certain of its properties, and consequently, its ability to control decisions
relating to such properties may be limited.

    Real property investments are also subject to risks which are specific to
the investment sector or type of property in which the real estate companies are
investing.

    Retail Properties. Retail properties are affected by the overall health of
the applicable economy. A retail property may be adversely affected by the
growth of alternative forms of retailing, bankruptcy, decline in drawing power,
departure or cessation of operations of an anchor tenant, a shift in consumer
demand due to demographic changes, and/or changes in consumer preference (for
example, to discount retailers) and spending patterns. A retail property may
also be adversely affected if a significant tenant ceases operation at such
location, voluntarily or otherwise. Certain tenants at retail properties may be
entitled to terminate their leases if an anchor tenant ceases operations at such
property.

    Office Properties. Office properties generally require their owners to
expend significant amounts for general capital improvements, tenant improvements
and costs of reletting space. In addition, office properties that are not
equipped to accommodate the needs of modern businesses may become functionally
obsolete and thus non-competitive. Office properties are affected by the

                                       39




<Page>
overall health of the economy as well as economic declines in the businesses
operated by their tenants. The risks of such an adverse effect is increased if
the property revenue is dependent on a single tenant or if there is a
significant concentration of tenants in a particular business or industry.

    Hotel Properties. The risks of hotel properties include, among other things,
the necessity of a high level of continuing capital expenditures to keep
necessary furniture, fixtures and equipment updated, competition from other
hotels, increases in operating costs (which increases may not necessarily be
offset in the future by increased room rates), dependence on business and
commercial travelers and tourism, increases in fuel costs and other expenses of
travel, changes to regulation of operating liquor and other licenses, and
adverse effects of general and local economic conditions. Due to the fact that
hotel rooms are generally rented for short periods of time, hotel properties
tend to be more sensitive to adverse economic conditions and competition than
many other commercial properties.

    Also, hotels may be operated pursuant to franchise, management and operating
agreements that may be terminable by the franchiser, the manager or the
operator. Contrarily, it may be difficult to terminate an ineffective operator
of a hotel property subsequent to a foreclosure of such property.

    Healthcare Properties. Healthcare properties and healthcare providers are
affected by several significant factors including federal, state and local laws
governing licenses, certification, adequacy of care, pharmaceutical
distribution, rates, equipment, personnel and other factors regarding
operations; continued availability of revenue from government reimbursement
programs (primarily Medicaid and Medicare); and competition in terms of
appearance, reputation, quality and cost of care with similar properties on a
local and regional basis.

    These governmental laws and regulations are subject to frequent and
substantial changes resulting from legislation, adoption of rules and
regulations, and administrative and judicial interpretations of existing law.
Changes may also be applied retroactively and the timing of such changes cannot
be predicted. The failure of any healthcare operator to comply with governmental
laws and regulations may affect its ability to operate its facility or receive
government reimbursement. In addition, in the event that a tenant is in default
on its lease, a new operator or purchaser at a foreclosure sale will have to
apply in its own right for all relevant licenses if such new operator does not
already hold such licenses. There can be no assurance that such new licenses
could be obtained, and consequently, there can be no assurance that any
healthcare property subject to foreclosure will be disposed of in a timely
manner.

    Multifamily Properties. The value and successful operation of a multifamily
property may be affected by a number of factors such as the location of the
property, the ability of management to provide adequate maintenance and
insurance, types of services provided by the property, the level of mortgage
rates, presence of competing properties, the relocation of tenants to new
projects with better amenities, adverse economic conditions in the locale, the
amount of rent charged, and oversupply of units due to new construction. In
addition, multifamily properties may be subject to rent control laws or other
laws affecting such properties, which could impact the future cash flows of such
properties.

    Insurance Issues. Certain of the portfolio companies may, in connection with
the issuance of securities, have disclosed that they carry comprehensive
liability, fire, flood, earthquake extended coverage and rental loss insurance
with policy specifications, limits and deductibles customarily carried for
similar properties. However such insurance is not uniform among the portfolio

                                       40




<Page>
companies. Moreover, there are certain types of extraordinary losses that may be
uninsurable, or not economically insurable. Certain of the properties may be
located in areas that are subject to earthquake activity for which insurance may
not be maintained. Should a property sustain damage as a result of an
earthquake, even if the portfolio company maintains earthquake insurance, the
portfolio company may incur substantial losses due to insurance deductibles,
co-payments on insured losses or uninsured losses. Should any type of uninsured
loss occur, the portfolio company could lose its investment in, and anticipated
profits and cash flows from, a number of properties and as a result, would
impact the Fund's investment performance.

    Credit Risk. REITs may be highly leveraged and financial covenants may
affect the ability of REITs to operate effectively. The portfolio companies are
subject to risks normally associated with debt financing. If the principal
payments of a real estate company's debt cannot be refinanced, extended or paid
with proceeds from other capital transactions, such as new equity capital, the
real estate company's cash flow may not be sufficient to repay all maturing debt
outstanding.

    In addition, a portfolio company's obligation to comply with financial
covenants, such as debt-to-asset ratios and secured debt-to-total asset ratios,
and other contractual obligations may restrict a REIT's range of operating
activity. A portfolio company, therefore, may be limited from incurring
additional indebtedness, selling its assets and engaging in mergers or making
acquisitions which may be beneficial to the operation of the REIT.

    Environmental Issues. In connection with the ownership (direct or indirect),
operation, management and development of real properties that may contain
hazardous or toxic substances, a portfolio company may be considered an owner or
operator of such properties or as having arranged for the disposal or treatment
of hazardous or toxic substances and, therefore, may be potentially liable for
removal or remediation costs, as well as certain other costs, including
governmental fines and liabilities for injuries to persons and property. The
existence of any such material environmental liability could have a material
adverse effect on the results of operations and cash flow of any such portfolio
company and, as a result, the amount available to make distributions on the
shares could be reduced.

    Smaller Companies. Even the larger REITs in the industry tend to be small to
medium-sized companies in relation to the equity markets as a whole. There may
be less trading in a smaller company's stock, which means that buy and sell
transactions in that stock could have a larger impact on the stock's price than
is the case with larger company stocks. Smaller companies also may have fewer
lines of business so that changes in any one line of business may have a greater
impact on a smaller company's stock price than is the case for a larger company.
Further, smaller company stocks may perform in different cycles than larger
company stocks. Accordingly, REIT shares can be more volatile than -- and at
times will perform differently from -- large company stocks such as those found
in the Dow Jones Industrial Average.

    Tax Issues. REITs are subject to a highly technical and complex set of
provisions in the Code. It is possible that the Fund may invest in a real
estate company which purports to be a REIT and that the company could fail
to qualify as a REIT. In the event of any such unexpected failure to qualify
as a REIT, the company would be subject to corporate-level taxation,
significantly reducing the return to the Fund on its investment in such
company. REITs could possibly fail to qualify for tax free pass-through of
income under the Code, or to maintain their exemptions from registration
under the 1940 Act. The above factors may also adversely affect a borrower's
or a lessee's ability to meet its

                                       41




<Page>
obligations to the REIT. In the event of a default by a borrower or lessee, the
REIT may experience delays in enforcing its rights as a mortgagee or lessor and
may incur substantial costs associated with protecting its investments.

SPECIAL RISKS RELATED TO PREFERRED SECURITIES

    There are special risks associated with investing in preferred securities,
including:

    Deferral and Omission. Preferred securities may include provisions that
permit the issuer, at its discretion, to defer or omit distributions for a
stated period without any adverse consequences to the issuer. If the Fund owns a
preferred security that is deferring or omitting its distributions, the Fund may
be required to report income for tax purposes although it has not yet received
such income.

    Subordination. Preferred securities are subordinated to bonds and other debt
instruments in a company's capital structure in terms of priority to corporate
income and liquidation payments, and therefore will be subject to greater credit
risk than more senior debt instruments.

    Liquidity. Preferred securities may be substantially less liquid than many
other securities, such as common stocks or U.S. Government securities.

    Limited Voting Rights. Generally, traditional preferred securities offer no
voting rights with respect to the issuing company unless preferred dividends
have been in arrears for a specified number of periods, at which time the
preferred security holders may elect a number of directors to the issuer's
board. Generally, once all the arrearages have been paid, the preferred security
holders no longer have voting rights. Hybrid-preferred security holders
generally have no voting rights.

    Special Redemption Rights. In certain varying circumstances, an issuer of
preferred securities may redeem the securities prior to a specified date. For
instance, for certain types of preferred securities, a redemption may be
triggered by a change in Federal income tax or securities laws. As with call
provisions, a redemption by the issuer may negatively impact the return of the
security held by the Fund.

    Supply of Hybrid-Preferred Securities. The Financial Accounting Standards
Board currently is reviewing accounting guidelines relating to hybrid-preferred
securities. To the extent that a change in the guidelines could adversely affect
the market for, and availability of, these securities, the Fund may be adversely
affected. The adoption of the Bush Administration's proposal to eliminate the
Federal income tax on dividends may also adversely impact the market and supply
of hybrid-preferred securities if the issuance of such securities becomes less
attractive to issuers.

    New Types of Securities. From time to time, preferred securities, including
hybrid-preferred securities, have been, and may in the future be, offered having
features other than those described herein. The Fund reserves the right to
invest in these securities if the Investment Manager believes that doing so
would be consistent with the Fund's investment objectives and policies. Since
the market for these instruments would be new, the Fund may have difficulty
disposing of them at a suitable price and time. In addition to limited
liquidity, these instruments may present other risks, such as high price
volatility.

                                       42




<Page>
GENERAL RISKS OF SECURITIES LINKED TO THE FINANCIAL SERVICES INDUSTRY

    The Fund intends to invest at least 25% of its total assets in securities of
companies principally engaged in the financial services industry, which are
prominent issuers of preferred securities. This policy makes the Trust more
susceptible to adverse economic or regulatory occurrences affecting that sector.

    Concentration of investments in the financial services sector includes the
following risks:

     regulatory actions -- financial services companies may suffer a setback if
     regulators change the rules under which they operate;

     changes in interest rates -- unstable interest rates can have a
     disproportionate effect on the financial services sector;

     concentration of loans -- financial services companies whose securities the
     Fund may purchase may themselves have concentrated portfolios, such as a
     high level of loans to real estate developers, which makes them vulnerable
     to economic conditions that affect that sector; and

     competition -- financial services companies have been affected by increased
     competition, which could adversely affect the profitability or viability of
     such companies.

FOREIGN SECURITIES

    Under normal market conditions, the Fund may invest up to 20% of its total
assets in U.S. dollar denominated securities of foreign issuers traded or listed
on a U.S. securities exchange ('Foreign Securities'). Typically, the Fund will
not hold any Foreign Securities of issuers in so-called 'emerging markets' (or
lesser developed countries). Investments in such securities are particularly
speculative. Investing in Foreign Securities involves certain risks not involved
in domestic investments, including, but not limited to:

     future foreign economic, financial, political and social developments;

     different legal systems;

     the possible imposition of exchange controls or other foreign governmental
     laws or restrictions;

     less governmental supervision;

     regulation changes;

     changes in currency exchange rates;

     less publicly available information about companies due to less rigorous
     disclosure or accounting standards or regulatory practices;

     high and volatile rates of inflation;

     fluctuating interest rates;

     less publicly available information; and

     different accounting, auditing and financial record-keeping standards and
     requirements.

    Investments in Foreign Securities, especially in emerging market countries,
will expose the Fund to the direct or indirect consequences of political, social
or economic changes in the countries that issue the securities or in which the
issuers are located. Certain countries in which the Fund may invest, especially
emerging market countries, have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large

                                       43




<Page>
amounts of external debt, balance of payments and trade difficulties and extreme
poverty and unemployment. Many of these countries are also characterized by
political uncertainty and instability. The cost of servicing external debt will
generally be adversely affected by rising international interest rates because
many external debt obligations bear interest at rates which are adjusted based
upon international interest rates. In addition, with respect to certain foreign
countries, there is a risk of:

     the possibility of expropriation of assets;

     confiscatory taxation;

     difficulty in obtaining or enforcing a court judgment;

     economic, political or social instability; and

     diplomatic developments that could affect investments in those countries.

    In addition, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as:

     growth of gross domestic product;

     rates of inflation;

     capital reinvestment;

     resources;

     self-sufficiency; and

     balance of payments position.

    In addition, certain investments in Foreign Securities also may be subject
to foreign withholding taxes.

    Investing in securities of companies in emerging markets may entail special
risks relating to potential political and economic instability and the risks of
expropriation, nationalization, confiscation or the imposition of restrictions
on foreign investment, the lack of hedging instruments, and on repatriation of
capital invested. Emerging securities markets are substantially smaller, less
developed, less liquid and more volatile than the major securities markets. The
limited size of emerging securities markets and limited trading value compared
to the volume of trading in U.S. securities could cause prices to be erratic for
reasons apart from factors that affect the quality of the securities. For
example, limited market size may cause prices to be unduly influenced by traders
who control large positions. Adverse publicity and investors' perceptions,
whether or not based on fundamental analysis, may decrease the value and
liquidity of portfolio securities, especially in these markets. Many emerging
market countries have experienced substantial, and in some periods extremely
high, rates of inflation for many years. Inflation and rapid fluctuations in
inflation rates and corresponding currency devaluations have had and may
continue to have negative effects on the economies and securities markets of
certain emerging market countries. Typically, the Fund will not hold any Foreign
Securities of emerging market issuers, and, if it does, such securities will not
comprise more than 10% of the Fund's total assets.

    As a result of these potential risks, the Investment Manager may determine
that, notwithstanding otherwise favorable investment criteria, it may not be
practicable or appropriate to invest in a particular country. The Fund may
invest in countries in which foreign investors, including the Investment
Manager, have had no or limited prior experience.

                                       44




<Page>
CONVERTIBLE SECURITIES RISK

    Although to a lesser extent than with fixed-income securities, the market
value of convertible securities tends to decline as interest rates increase and,
conversely, tends to increase as interest rates decline. In addition, because of
the conversion feature, the market value of convertible securities tends to vary
with fluctuations in the market value of the underlying common stock. A unique
feature of convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis, and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.

COMMON STOCK RISK

    While common stock has historically generated higher average returns than
fixed income securities, common stock has also experienced significantly more
volatility in those returns. An adverse event, such as an unfavorable earnings
report, may depress the value of common stock held by the Fund. Also, the price
of common stock is sensitive to general movements in the stock market. A drop in
the stock market may depress the price of common stock held by the Fund.

TAX RISK

    The Fund may invest in preferred securities or other securities the Federal
income tax treatment of which may not be clear or may be subject to
recharacterization by the Internal Revenue Service. It could be more difficult
for the Fund to comply with the tax requirements applicable to regulated
investment companies (see 'Taxation') if the tax characterization of the Fund's
investments or the tax treatment of the income from such investments were
successfully challenged by the Internal Revenue Service. The Bush Administration
has announced a proposal to eliminate the Federal income tax on dividends of
income previously taxed at the corporate level. The availability of tax-free
dividends may reduce the value of, and return on, certain securities that are
part of the Fund's investment portfolio. Moreover, the proposal may be given
retroactive effect. This change could adversely affect the Fund's shareholders
and distributions they receive from the Fund.

RESTRICTED AND ILLIQUID SECURITIES

    The Fund may invest, on an ongoing basis, in restricted securities and other
investments that may be illiquid. Illiquid securities are securities that are
not readily marketable and may include some restricted securities, which are
securities that may not be resold to the public without an effective
registration statement under the Securities Act or, if they are unregistered,
may be sold only in a privately negotiated transaction or pursuant to an
exemption from registration. Illiquid investments involve the risk that the
securities will not be able to be sold at the time desired by the Fund or at
prices approximating the value at which the Fund is carrying the securities on
its books.

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<Page>
LEVERAGE RISK

    The Fund intends to use leverage by issuing Fund Preferred Shares,
representing approximately 33 1/3% of the Fund's total capital after their
issuance or alternatively, through borrowing. Leverage is a speculative
technique and there are special risks and costs associated with leveraging. For
a more detailed description of the risks associated with leverage, see 'Use of
Leverage.'

INTEREST RATE TRANSACTIONS RISK

    The Fund may enter into a swap or cap transaction to attempt to protect
itself from increasing dividend or interest expenses resulting from increasing
short-term interest rates. A decline in interest rates may result in a decline
in the value of the swap or cap which may result in a decline in the net asset
value of the Fund. A sudden and dramatic decline in interest rates may result in
a significant decline in the net asset value of the Fund. See 'Interest Rate
Transactions.'

MARKET PRICE DISCOUNT FROM NET ASSET VALUE

    Shares of closed-end investment companies frequently trade at a discount
from their net asset value. This characteristic is a risk separate and distinct
from the risk that the Fund's net asset value could decrease as a result of our
investment activities and may be greater for investors expecting to sell their
shares in a relatively short period following completion of this offering. The
net asset value of the shares will be reduced immediately following the offering
as a result of the payment of certain offering costs. Whether investors will
realize gains or losses upon the sale of the shares will depend not upon the
Fund's net asset value but entirely upon whether the market price of the shares
at the time of sale is above or below the investor's purchase price for the
shares. Because the market price of the shares will be determined by factors
such as relative supply of and demand for shares in the market, general market
and economic conditions, and other factors beyond the control of the Fund, we
cannot predict whether the shares will trade at below or above net asset value,
or at below or above the initial public offering price.

                         ADDITIONAL RISK CONSIDERATIONS

PORTFOLIO TURNOVER

    We may engage in portfolio trading when considered appropriate, but
short-term trading will not be used as the primary means of achieving the Fund's
investment objectives. Although we cannot accurately predict our portfolio
turnover rate, it is not expected to exceed 100% under normal circumstances.
However, there are no limits on the rate of portfolio turnover, and investments
may be sold without regard to length of time held when, in the opinion of the
Investment Manager, investment considerations warrant such action. A higher
turnover rate results in correspondingly greater brokerage commissions and other
transactional expenses which are borne by the Fund. High portfolio turnover may
result in the realization of net short-term capital gains by the Fund which,
when distributed to shareholders, will be taxable as ordinary income. See
'Taxation.'

                                       46




<Page>
INFLATION RISK

    Inflation risk is the risk that the value of assets or income from
investment will be worth less in the future as inflation decreases the value of
money. As inflation increases, the real value of the Common Shares and
distributions can decline. In addition, during any periods of rising inflation,
Fund Preferred share dividend rates would likely increase, which would tend to
further reduce returns to holders of Common Shares.

NON-DIVERSIFIED STATUS

    The Fund is classified as a 'non-diversified' investment company under the
1940 Act, which means we are not limited by the 1940 Act in the proportion of
our assets that may be invested in the securities of a single issuer. However,
we intend to conduct our operations so as to qualify as a regulated investment
company for purposes of the Code, which generally will relieve the Fund of any
liability for federal income tax to the extent our earnings are distributed to
shareholders. See 'Taxation' in the SAI. To so qualify, among other
requirements, we will limit our investments so that, at the close of each
quarter of the taxable year, (i) not more than 25% of the market value of our
total assets will be invested in the securities (other than U.S. Government
securities or the securities of other regulated investment companies) of a
single issuer, or two or more issuers which the Fund controls and are engaged in
the same, similar or related trades or businesses and (ii) at least 50% of the
market value of our total assets will be invested in cash and cash items, U.S.
Government securities, securities of other regulated investment companies and
other securities; provided, however, that with respect to such other securities,
not more than 5% of the market value of our total assets will be invested in the
securities of a single issuer and we will not own more than 10% of the
outstanding voting securities of a single issuer. Because we, as a non-
diversified investment company, may invest in a smaller number of individual
issuers than a diversified investment company, an investment in the Fund
presents greater risk to you than an investment in a diversified company.

ANTI-TAKEOVER PROVISIONS

    Certain provisions of our Articles of Incorporation and By-Laws may have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change our structure. These provisions may also have the
effect of depriving shareholders of an opportunity to sell their shares at a
premium over prevailing market prices. These include provisions for staggered
terms of office for Directors, super-majority voting requirements for merger,
consolidation, liquidation, termination and asset sale transactions, amendments
to the Articles of Incorporation, and conversion to open-end status. See
'Description of Shares' and 'Certain Provisions of the Articles of Incorporation
and By-Laws.'

MARKET DISRUPTION RISK

    The terrorist attacks in the U.S. on September 11, 2001 had a disruptive
effect on the securities markets. The war in Iraq also has resulted in recent
market volatility and may have long-term effects on the U.S. and worldwide
financial markets and may cause further economic uncertainties in the U.S. and
worldwide. The Fund cannot predict the effects of the war or similar events in
the future on the U.S. economy and securities markets.

                                       47




<Page>
                           HOW THE FUND MANAGES RISK

INVESTMENT LIMITATIONS

    The Fund has adopted certain investment limitations designed to limit
investment risk. These limitations are fundamental and may not be changed
without the approval of the holders of a majority of the outstanding common
shares and, if issued, Fund Preferred Shares voting together as a single class,
and the approval of the holders of a majority of the Preferred Shares voting as
a separate class. Among other restrictions, the Fund may not invest more than
25% of its managed assets in securities of issuers in any one industry except
for the financial services and real estate industries.

    The Fund may become subject to guidelines that are more limiting than its
investment restrictions in order to obtain and maintain ratings from Moody's,
S&P or another nationally recognized rating agency on the Fund Preferred Shares
that it intends to issue. The Fund does not anticipate that such guidelines
would have a material adverse effect on the Fund's common shareholders or the
Fund's ability to achieve its investment objectives. See 'Investment Objectives
and Policies' in the SAI for a complete list of the fundamental and
non-fundamental investment policies of the Fund.

MANAGEMENT OF INVESTMENT PORTFOLIO AND CAPITAL STRUCTURE TO LIMIT LEVERAGE RISK

    The Fund may take certain actions if short-term interest rates increase or
market conditions otherwise change (or the Fund anticipates such an increase or
change) and the Fund's leverage begins (or is expected) to adversely affect
Common Shareholders. In order to attempt to offset such a negative impact of
leverage on Common Shareholders, the Fund shorten the average maturity of its
investment portfolio (by investing in short-term securities) or may reduce its
indebtedness or extend the maturity of outstanding Fund Preferred Shares or
otherwise reduce borrowings. The Fund may also attempt to reduce the leverage by
redeeming or otherwise purchasing Fund Preferred Shares. As explained above
under 'Risks -- Leverage,' the success of any such attempt to limit leverage
risk depends on the Investment Manager's ability to accurately predict interest
rate or other market changes. Because of the difficulty of making such
predictions, the Fund may never attempt to manage its capital structure in the
manner described in this paragraph.

    If market conditions suggest that additional leverage would be beneficial,
the Fund may sell previously unissued Fund Preferred Shares or Fund Preferred
Shares that the Fund previously issued but later repurchased or otherwise
increase borrowings.

LIMITED ISSUANCE OF FUND PREFERRED SHARES

    Under the 1940 Act, the Fund could issue Fund Preferred Shares having a
total liquidation value (original purchase price of the shares being liquidated
plus any accrued and unpaid dividends) of up to one-half of the value of the
asset coverage of the Fund. If the total liquidation value of the Fund Preferred
shares was ever more than one-half of the value of the Fund's asset coverage,
the Fund would not be able to declare dividends on the Common Shares until the
liquidation value, as a percentage of the Fund's assets, was reduced. The Fund
intends to issue Fund Preferred shares representing about 33 1/3% of the Fund's
total capital immediately after the time of issuance. This higher than required
margin of net asset value provides a cushion against

                                       48




<Page>
later fluctuations in the value of the Fund's portfolio and will subject Common
Shareholders to less income and net asset value volatility than if the Fund were
more leveraged. The Fund intends to purchase or redeem Fund Preferred Shares, if
necessary, to keep the liquidation value of the Fund Preferred Shares below
one-half of the value of the Fund's asset coverage.

LIMITED BORROWINGS

    Under the requirements of the 1940 Act, the Fund, immediately after any
borrowings, must have an asset coverage of at least 300%. With respect to any
such borrowings, asset coverage means the ratio which the value of the total
assets of the Fund, less all liabilities and indebtedness not represented by
senior securities (as defined in the 1940 Act), bears to the aggregate amount of
such borrowings represented by senior securities issued by the Fund. Certain
types of borrowings may result in the Fund being subject to covenants in credit
agreements relating to asset coverages or portfolio composition or otherwise. In
addition, the Fund may be subject to certain restrictions imposed by guidelines
of one or more NRSROs which may issue ratings for commercial paper or notes
issued by the Fund. Such restrictions may be more stringent than those imposed
by the 1940 Act.

                             MANAGEMENT OF THE FUND

    The business and affairs of the Fund are managed under the direction of the
Board of Directors. The Directors approve all significant agreements between the
Fund and persons or companies furnishing services to it, including the Fund's
agreement with its Investment Manager, administrator, custodian and transfer
agent. The management of the Fund's day-to-day operations is delegated to its
officers, the Investment Manager and the Fund's administrator, subject always to
the investment objectives and policies of the Fund and to the general
supervision of the Directors. The names and business addresses of the Directors
and officers of the Fund and their principal occupations and other affiliations
during the past five years are set forth under 'Management of the Fund' in the
SAI.

INVESTMENT MANAGER

    Cohen & Steers Capital Management, Inc., with offices located at 757 Third
Avenue, New York, New York 10017, has been retained to provide investment
advice, and, in general, to conduct the management and investment program of the
Fund under the overall supervision and control of the Directors of the Fund.
Cohen & Steers Capital Management, Inc., a registered investment adviser, was
formed in 1986 and is a leading U.S. manager of portfolios dedicated to
investments primarily in REITs with approximately $  billion of assets under
management as of March   , 2003, including more than $   million in REIT
preferred securities. Its current clients include pension plans, endowment funds
and registered investment companies, including the Fund, Cohen & Steers
Advantage Income Realty Fund, Inc., Cohen & Steers Quality Income Realty Fund,
Inc. and Cohen & Steers Total Return Realty Fund, Inc., which are closed-end
investment companies, and Cohen & Steers Institutional Realty Shares, Inc.,
Cohen & Steers Realty Shares, Inc., Cohen & Steers Special Equity Fund, Inc. and
Cohen & Steers Equity Income Fund, Inc., which are open-end investment
companies.

                                       49




<Page>
INVESTMENT MANAGEMENT AGREEMENT

    Under its Investment Management Agreement with the Fund, the Investment
Manager furnishes a continuous investment program for the Fund's portfolio,
makes the day-to-day investment decisions for the Fund, and generally manages
the Fund's investments in accordance with the stated policies of the Fund,
subject to the general supervision of the Board of Directors of the Fund. The
Investment Manager also performs certain administrative services for the Fund
and provides persons satisfactory to the Directors of the Fund to serve as
officers of the Fund. Such officers, as well as certain other employees and
Directors of the Fund, may be directors, officers, or employees of the
Investment Manager.

    For its services under the Investment Management Agreement, the Fund pays
the Investment Manager a monthly management fee computed at the annual rate of
0.  % of the average daily managed asset value of the Fund. Managed asset value
is the net asset value of the Common Shares plus the liquidation preference of
any Fund Preferred Shares and the principal amount of any borrowings used for
leverage. In addition to the monthly management fee, the Fund pays all other
costs and expenses of its operations, including compensation of its Directors,
custodian, transfer agency and dividend disbursing expenses, legal fees,
expenses of independent auditors, expenses of repurchasing shares, expenses of
issuing any Fund Preferred Shares, listing expenses, expenses of preparing,
printing and distributing shareholder reports, notices, proxy statements and
reports to governmental agencies, and taxes, if any. When the Fund is utilizing
leverage, the fees paid to the Investment Manager for investment advisory and
management services will be higher than if the Fund did not utilize leverage
because the fees paid will be calculated based on the Fund's managed assets,
which includes the liquidation preference of any Fund Preferred Shares and the
principal amount of borrowings for leverage. See 'Use of Leverage.'

    The Fund's portfolio managers are:

        Martin Cohen -- Mr. Cohen is a Director, President and Treasurer of the
    Fund. He is, and has been since their inception, President of Cohen & Steers
    Capital Management, Inc., the Fund's investment adviser, and Vice President
    of Cohen & Steers Securities, Inc., a registered broker-dealer. Mr. Cohen is
    a 'controlling person' of the Investment Manager on the basis of his
    ownership of the Investment Manager's stock.

        Robert H. Steers -- Mr. Steers is a Director, Chairman and Secretary of
    the Fund. He is, and has been since their inception, Chairman of Cohen &
    Steers Capital Management, Inc., the Fund's investment adviser, and
    President of Cohen & Steers Securities, Inc., a registered broker-dealer.
    Mr. Steers is a 'controlling person' of the Investment Manager on the basis
    of his ownership of the Investment Manager's stock.

        Greg E. Brooks -- Mr. Brooks joined Cohen & Steers Capital Management,
    Inc., the Fund's Investment Manager, as a Vice President in April 2000 and
    has been a Senior Vice President since January 2002. Prior to joining Cohen
    & Steers in 2000, Mr. Brooks was an investment analyst with another real
    estate securities investment manager. Mr. Brooks is a Certified Financial
    Analyst.

        William F. Scapell -- Mr. Scapell joined Cohen & Steers Capital
    Management, Inc., the Fund's Investment Manager, as a Senior Vice President
    in February 2003. Prior to joining Cohen & Steers, Mr. Scapell was a
    director in the fixed income research department of Merrill Lynch & Co.,
    Inc., where he was also their chief strategist for preferred securities.
    Before

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<Page>
    joining Merrill Lynch's research department, Mr. Scapell worked in Merrill
    Lynch Treasury with a focus on balance sheet management. Prior to working
    for Merrill Lynch, Mr. Scapell was employed at the Federal Reserve Bank of
    New York in both bank supervision and monetary policy roles.

ADMINISTRATION AND SUB-ADMINISTRATION AGREEMENT

    Under its Administration Agreement with the Fund, the Investment Manager
provides certain administrative and accounting functions for the Fund, including
providing administrative services necessary for the operations of the Fund and
furnishing office space and facilities required for conducting the business of
the Fund.

    In accordance with the Administration Agreement and with the approval of the
Board of Directors of the Fund, the Fund has entered into an agreement with
State Street Bank as sub-administrator under a fund accounting and
administration agreement (the 'Sub-Administration Agreement'). Under the
Sub-Administration Agreement, State Street Bank has assumed responsibility for
certain fund administration services.

    Under the Administration Agreement, the Fund pays the Investment Manager an
amount equal to on an annual basis 0.02% of the Fund's managed assets. Under the
Sub-Administration agreement, the Fund pays State Street Bank a monthly
administration fee. The sub-administration fee paid by the Fund to State Street
Bank is computed on the basis of the net assets in the Fund at an annual rate
equal to 0.030% of the first $200 million in assets, 0.020% of the next $200
million, and 0.010% of assets in excess of $400 million, with a minimum fee of
$120,000. The aggregate fee paid by the Fund and the other funds advised by the
Investment Manager to State Street Bank is computed by multiplying the total
number of funds by each break point in the above schedule in order to determine
the aggregate break points to be used in calculating the total fee paid by the
Cohen & Steers family of funds (i.e., 6 funds at $200 million or $1.2 billion at
0.040%, etc.). The Fund is then responsible for its pro rata amount of the
aggregate administration fee. State Street Bank also serves as the Fund's
custodian and EquiServe Trust Company, NA has been retained to serve as the
Fund's transfer agent, dividend disbursing agent and registrar. See 'Custodian,
Transfer Agent, Dividend Disbursing Agent and Registrar.'

                          DIVIDENDS AND DISTRIBUTIONS

LEVEL RATE DIVIDEND POLICY

    Subject to the determination of the Board of Directors to implement a
Managed Dividend Policy, as discussed below, commencing with the Fund's first
dividend, the Fund intends to make regular monthly cash distributions to Common
Shareholders at a level rate based on the projected performance of the Fund,
which rate is a fixed dollar amount that may be adjusted from time to time.
Distributions can only be made from net investment income after paying accrued
dividends on, or redeeming or liquidating, Fund Preferred Shares, if any, and
making interest and required principal payments on Borrowings, if any, as well
as making any required payments on any interest rate transactions. The Fund's
ability to maintain a Level Rate Dividend Policy will depend on a number of
factors, including the stability of income received from its investments and
dividends payable on Fund Preferred Shares, if any, and interest and required
principal payments on Borrowings, if any. Over time, all the net investment
income of the Fund will be distributed. At

                                       51




<Page>
least annually, the Fund intends to distribute all of its net capital gain and
ordinary taxable income after paying any accrued dividends on, or redeeming or
liquidating, any Fund Preferred Shares, if any, or making interest and required
principal payments on Borrowings, if any. Initial distributions to Common
Shareholders are expected to be declared approximately 45 days, and paid
approximately 60 to 75 days, from the commencement of this offering, depending
upon market conditions. The net income of the Fund consists of all income
accrued on portfolio assets less all expenses of the Fund. Expenses of the Fund
are accrued each day. In addition, the Fund currently expects that a portion of
its distributions will consist of amounts in excess of investment company
taxable income and net capital gain derived from the non-taxable components of
the cash flow from the real estate underlying the Fund's portfolio investments.
To permit the Fund to maintain a more stable monthly distribution, the Fund will
initially distribute less than the entire amount of net investment income earned
in a particular period. The undistributed net investment income would be
available to supplement future distributions. As a result, the distributions
paid by the Fund for any particular monthly period may be more or less than the
amount of net investment income actually earned by the Fund during the period.
Undistributed net investment income will be added to the Fund's net asset value
and, correspondingly, distributions from undistributed net investment income
will be deducted from the Fund's net asset value. See 'Taxation.'

MANAGED DIVIDEND POLICY

    In reliance on an exemptive order, issued by the Securities and Exchange
Commission, the Fund may, subject to the determination of its Board of
Directors, implement a Managed Dividend Policy. Under a Managed Dividend Policy,
the Fund would intend to distribute a monthly fixed percentage of net asset
value to Common Shareholders. As with the Level Dividend Rate Policy,
distributions would be made only after paying dividends on, or redeeming or
liquidating, Fund Preferred Shares, if any, and making interest and required
principal payments on borrowings, if any. Under a Managed Dividend Policy, if,
for any monthly distribution, net investment income and net realized capital
gain were less than the amount of the distribution, the difference would be
distributed from the Fund's assets. The Fund's final distribution for each
calendar year would include any remaining net investment income and net realized
capital gain undistributed during the year. Pursuant to the requirements of the
1940 Act and other applicable laws, a notice would accompany each monthly
distribution with respect to the estimated source of the distribution made. In
the event the Fund distributed in any calendar year amounts in excess of net
investment income and net realized capital gain (such excess, the 'Excess'),
such distribution would decrease the Fund's total assets and, therefore, have
the likely effect of increasing the Fund's expense ratio. There is a risk that
the Fund would not eventually realize capital gains in an amount corresponding
to a distribution of the Excess. In addition, in order to make such
distributions, the Fund may have to sell a portion of its investment portfolio
at a time when independent investment judgment might not dictate such action.
There is no guarantee that the Fund will receive an exemptive order facilitating
the implementation of a Managed Dividend Policy or, if received, that the Board
of Directors will determine to implement a Managed Dividend Policy. The Board of
Directors reserves the right to change the dividend policy from time to time.

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<Page>
DIVIDEND REINVESTMENT PLAN

    The Fund has a Dividend Reinvestment Plan (the 'Plan') commonly referred to
as an 'opt-out' plan. Each shareholder will have all distributions of dividends
and capital gains automatically reinvested in additional Common Shares by
EquiServe Trust Company, NA as agent for shareholders pursuant to the Plan (the
'Plan Agent'), unless they elect to receive cash. The Plan Agent will either
(i) effect purchases of Common Shares under the Plan in the open market or
(ii) distribute newly issued Common Shares of the Fund. Shareholders who elect
not to participate in the Plan will receive all distributions in cash paid by
check mailed directly to the shareholder of record (or if the shares are held in
street or other nominee name, then to the nominee) by the Plan Agent, as
dividend disbursing agent. Shareholders whose Common Shares are held in the name
of a broker or nominee should contact the broker or nominee to determine whether
and how they may participate in the Plan.

    The Plan Agent serves as agent for the shareholders in administering the
Plan. After the Fund declares a dividend or makes a capital gain distribution,
the Plan Agent will, as agent for the participants, either (i) receive the cash
payment and use it to buy Common Shares in the open market, on the New York
Stock Exchange or elsewhere, for the participants' accounts or (ii) distribute
newly issued Common Shares of the Fund on behalf of the participants. The Plan
Agent will receive cash from the Fund with which to buy Common Shares in the
open market if, on the determination date, the net asset value per share exceeds
the market price per share plus estimated brokerage commissions on that date.
The Plan Agent will receive the dividend or distribution in newly issued Common
Shares of the Fund if, on the determination date, the market price per share
plus estimated brokerage commissions equals or exceeds the net asset value per
share of the Fund on that date. The number of shares to be issued will be
computed at a per share rate equal to the greater of (i) the net asset value or
(ii) 95% of the closing market price per share on the payment date.

    Participants in the Plan may withdraw from the Plan upon written notice to
the Plan Agent. Such withdrawal will be effective immediately if received not
less than ten days prior to a distribution record date; otherwise, it will be
effective for all subsequent dividend record dates. When a participant withdraws
from the Plan or upon termination of the Plan as provided below, certificates
for whole Common Shares credited to his or her account under the Plan will be
issued and a cash payment will be made for any fraction of a Common Share
credited to such account. In the alternative, upon receipt of the participant's
instructions, Common Shares will be sold and the proceeds sent to the
participant less brokerage commissions and any applicable taxes.

    The Plan Agent maintains each shareholder's account in the Plan and
furnishes confirmations of all acquisitions made for the participant as soon as
practicable but no later than 60 days. Common Shares in the account of each Plan
participant will be held by the Plan Agent on behalf of the participant. Proxy
material relating to shareholders' meetings of the Fund will include those
shares purchased as well as shares held pursuant to the Plan.

    In the case of shareholders, such as banks, brokers or nominees, which hold
Common Shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of Common Shares certified from
time to time by the record shareholders as representing the total amount
registered in the record shareholder's name and held for the account of
beneficial owners who are participants in the Plan. Common Shares may be
purchased through any of the underwriters, acting as broker or, after the
completion of this offering, dealer.

                                       53




<Page>
    The Plan Agent's fees for the handling of reinvestment of dividends and
other distributions will be paid by the Fund. Each participant will pay a pro
rata share of brokerage commissions incurred with respect to the Plan Agent's
open market purchases in connection with the reinvestment of distributions.
There are no other charges to participants for reinvesting dividends or capital
gain distributions.

    The automatic reinvestment of dividends and other distributions will not
relieve participants of any income tax that may be payable or required to be
withheld on such dividends or distributions. See 'Taxation.'

    Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any distribution paid subsequent to written notice of the change sent
to all shareholders of the Fund at least 90 days before the record date for the
dividend or distribution. The Plan also may be amended or terminated by the Plan
Agent by at least 90 days' written notice to all shareholders of the Fund. All
correspondence concerning the Plan should be directed to the Plan Agent by
telephone at 800-426-5523.

                              CLOSED-END STRUCTURE

    The Fund is a recently organized, non-diversified management investment
company (commonly referred to as a closed-end fund). Closed-end funds differ
from open-end funds (which are generally referred to as mutual funds) in that
closed-end funds generally list their shares for trading on a stock exchange and
do not redeem their shares at the request of the shareholder. This means that if
you wish to sell your shares of a closed-end fund you must trade them on the
market like any other stock at the prevailing market price at that time. In a
mutual fund, if the shareholder wishes to sell shares, the mutual fund will
redeem or buy back the shares at 'net asset value.' Mutual funds generally offer
new shares on a continuous basis to new investors, and closed-end funds
generally do not. The continuous inflows and outflows of assets in a mutual fund
can make it difficult to manage the fund's investments. By comparison,
closed-end funds are generally able to stay fully invested in securities that
are consistent with their investment objectives, and also have greater
flexibility to make certain types of investments, and to use certain investment
strategies, such as financial leverage and investments in illiquid securities.

    Shares of closed-end funds frequently trade at a discount to their net asset
value. Because of this possibility and the recognition that any such discount
may not be in the best interest of shareholders, the Fund's Board of Directors
might consider from time to time engaging in open market repurchases, tender
offers for shares at net asset value or other programs intended to reduce the
discount. We cannot guarantee or assure, however, that the Fund's Board will
decide to engage in any of these actions. Nor is there any guarantee or
assurance that such actions, if undertaken, would result in shares trading at a
price equal or close to net asset value per share. See 'Repurchase of Shares.'
The Board of Directors might also consider converting the Fund to an open-end
mutual fund, which would also require a vote of the shareholders of the Fund.

                     POSSIBLE CONVERSION TO OPEN-END STATUS

    The Fund may be converted to an open-end investment company at any time by a
vote of the outstanding shares. See 'Certain Provisions of the Articles of
Incorporation and By-Laws' for a discussion of voting requirements applicable to
conversion of the Fund to an open-end investment

                                       54




<Page>
company. If the Fund converted to an open-end investment company, it would be
required to redeem all Fund Preferred Shares then outstanding (requiring in turn
that it liquidate a portion of its investment portfolio) and the Fund's Common
Shares would no longer be listed on the New York Stock Exchange. Conversion to
open-end status could also require the Fund to modify certain investment
restrictions and policies. Shareholders of an open-end investment company may
require the company to redeem their shares at any time (except in certain
circumstances as authorized by or permitted under the 1940 Act) at their net
asset value, less such redemption charge, if any, as might be in effect at the
time of redemption. In order to avoid maintaining large cash positions or
liquidating favorable investments to meet redemptions, open-end investment
companies typically engage in a continuous offering of their shares. Open-end
investment companies are thus subject to periodic asset in-flows and out-flows
that can complicate portfolio management. The Board of Directors may at any time
propose conversion of the Fund to open-end status, depending upon its judgment
regarding the advisability of such action in light of circumstances then
prevailing.

                              REPURCHASE OF SHARES

    Shares of closed-end investment companies often trade at a discount to net
asset value, and the Fund's shares may also trade at a discount to their net
asset value, although it is possible that they may trade at a premium above net
asset value. The market price of the Fund's shares will be determined by such
factors as relative demand for and supply of shares in the market, the Fund's
net asset value, general market and economic conditions and other factors beyond
the control of the Fund. Although Common Shareholders will not have the right to
redeem their shares, the Fund may take action to repurchase shares in the open
market or make tender offers for its shares at net asset value. During the
pendency of any tender offer, the Fund will publish how Common Shareholders may
readily ascertain the net asset value. For more information see 'Repurchase of
Shares' in the SAI. Repurchase of the Common Shares may have the effect of
reducing any market discount to net asset value.

    There is no assurance that, if action is undertaken to repurchase or tender
for shares, such action will result in the shares trading at a price which
approximates their net asset value. Although share repurchases and tenders could
have a favorable effect on the market price of the shares, you should be aware
that the acquisition of shares by the Fund will decrease the total assets of the
Fund and, therefore, have the effect of increasing the Fund's expense ratio and
may adversely affect the ability of the Fund to achieve its investment
objectives. To the extent the Fund may need to liquidate investments to fund
repurchases of shares, this may result in portfolio turnover which will result
in additional expenses being borne by the Fund. The Board of Directors currently
considers the following factors to be relevant to a potential decision to
repurchase shares: the extent and duration of the discount, the liquidity of the
Fund's portfolio, the impact of any action on the Fund or its shareholders and
market considerations. Any share repurchases or tender offers will be made in
accordance with the requirements of the Securities Exchange Act of 1934 and the
1940 Act. See 'Taxation' for a description of the potential tax consequences of
a share repurchase.

                                       55




<Page>
                                    TAXATION

    The following brief tax discussion assumes you are a U.S. shareholder and
that you hold your shares as a capital asset. In the SAI we have provided more
detailed information regarding the tax consequences of investing in the Fund.
Dividends paid to you out of the Fund's current and accumulated earnings and
profits will, except in the case of capital gain dividends described below, be
taxable to you as ordinary income. Distributions of net capital gain (the excess
of net long-term capital gain over net short-term capital loss), if any,
designated as capital gain dividends are taxable to you as long-term capital
gains, regardless of how long you have held your Fund shares. A distribution of
an amount in excess of the Fund's current and accumulated earnings and profits
is treated as a non-taxable return of capital that reduces your tax basis in
your Fund shares; any such distributions in excess of your basis are treated as
gain from a sale of your shares. The tax treatment of your dividends and
distributions will be the same regardless of whether they were paid to you in
cash or reinvested in additional Fund shares.

    A distribution will be treated as paid to you on December 31 of the current
calendar year if it is declared by the Fund in October, November or December
with a record date in such a month and paid during January of the following
year.

    Each year, we will notify you of the tax status of dividends and other
distributions.

    If you sell your Fund shares, or have shares repurchased by the Fund, you
may realize a capital gain or loss which will be long-term or short-term,
depending generally on your holding period for the shares.

    We may be required to withhold U.S. federal income tax on all taxable
distributions and redemption proceeds payable if you

     fail to provide us with your correct taxpayer identification number;

     fail to make required certifications; or

     have been notified by the Internal Revenue Service that you are subject to
     backup withholding.

    Backup withholding is not an additional tax. Any amounts withheld may be
credited against your U.S. federal income tax liability.

    The Fund intends to qualify as a regulated investment company under federal
income tax law. If the Fund so qualifies and distributes each year to its
shareholders at least 90% of the sum of its investment company taxable income
(as that term is defined in the Code, but without regard to the deduction for
dividends paid) and net tax-exempt interest, the Fund will not be required to
pay federal income taxes on any income it distributes to shareholders. If the
Fund distributes less than an amount equal to the sum of 98% of its ordinary
income for the calendar year and 98% of its capital gain net income for the
one-year period ending on October 31 of such calendar year, plus such amounts
from previous years that were not distributed, then the Fund will be subject to
a nondeductible 4% excise tax on the undistributed amounts. Fund distributions
also may be subject to state and local taxes. You should consult with your own
tax adviser regarding the particular consequences of investing in the Fund.

    President Bush has recently proposed eliminating the taxation of dividends
paid by corporations to individuals out of previously taxed corporate income,
including such dividends received by a mutual fund and passed through to its
individual shareholders. If, or in what form, this proposal may be enacted into
law is uncertain. Under the current proposal, certain dividends

                                       56




<Page>
paid on preferred securities apparently would be permitted to be distributed
tax-free to individual shareholders (including individual shareholders of
closed-end funds, such as the Fund). At this time, however, some of the details
of the proposal have not been specified. In addition, it is uncertain if, and in
what form, the proposal will ultimately be adopted. Accordingly, it is not
possible to evaluate how this proposal might affect the tax discussion above.

                             DESCRIPTION OF SHARES

COMMON SHARES

    The Fund is authorized to issue 100,000,000 shares of Common Shares, $0.001
par value. The Common Shares have no preemptive, conversion, exchange or
redemption rights. Each share has equal voting, dividend, distribution and
liquidation rights. The Common Shares outstanding are, and those offered hereby
when issued, will be, fully paid and nonassessable. Common Shareholders are
entitled to one vote per share. All voting rights for the election of Directors
are noncumulative, which means that, assuming there are no Fund Preferred Shares
outstanding, the holders of more than 50% of the Common Shares can elect 100% of
the Directors then nominated for election if they choose to do so and, in such
event, the holders of the remaining Common Shares will not be able to elect any
Directors. Whenever Fund Preferred Shares or borrowings are outstanding, holders
of Common Shares will not be entitled to receive any distributions from the Fund
unless all accrued dividends on the Fund Preferred Shares and interest and
principal payments on borrowings have been paid, and unless the applicable asset
coverage requirements under the 1940 Act would be satisfied after giving effect
to the distribution. See 'Fund Preferred Shares' below. The Fund's Common Shares
have been approved for listing on the New York Stock Exchange upon notice of
issuance under the symbol '    .' Under the rules of the New York Stock Exchange
applicable to listed companies, the Fund will be required to hold an annual
meeting of shareholders in each year. The foregoing description and the
descriptions below under 'Fund Preferred Shares' and 'Certain Provisions of the
Articles of Incorporation and By-Laws' and above under 'Possible Conversion to
Open-End Status' are subject to the provisions contained in the Fund's Articles
of Incorporation and By-Laws.

    Net asset value will be reduced immediately following the offering by the
amount of the sales load and offering expenses paid by the Fund. The Investment
Manager has agreed to pay (i) all organizational expenses and (ii) offering
costs (other than sales load) that exceed $0.03 per Common Share. See 'Use of
Proceeds.'

    As of the date of this prospectus, Cohen & Steers Capital Management, Inc.
owned of record and beneficially          shares of the Fund's Common Shares,
constituting 100% of the outstanding shares of the Fund, and thus, until the
public offering of the shares is completed, will control the Fund.

FUND PREFERRED SHARES

    The Fund's Articles of Incorporation authorize the Board of Directors,
without approval of the Common Stockholders, to classify any unissued shares of
the Fund's common stock into preferred shares, par value $0.001 per share, in
one or more classes or series, with rights as determined by the Board of
Directors.

    The Fund's Board of Directors has indicated its intention to authorize an
offering of Fund Preferred Shares (representing approximately 33 1/3% of the
Fund's capital immediately after the

                                       57




<Page>
time the Fund Preferred Shares are issued) approximately one to three months
after completion of the offering of Common Shares. Any such decision is subject
to market conditions, the Fund's receipt of a AAA/aaa credit rating on the Fund
Preferred Shares and to the Board's continuing belief that leveraging the Fund's
capital structure through the issuance of Fund Preferred Shares is likely to
achieve the benefits to the Common Shareholders described in this prospectus.
The Board of Directors has indicated that the preference on distribution,
liquidation preference, and redemption provisions of the Fund Preferred Shares
will likely be as stated below.

    Limited Issuance of Fund Preferred Shares. Under the 1940 Act, the Fund
could issue Fund Preferred Shares with an aggregate liquidation value of up to
one-half of the value of the Fund's total assets less liabilities other than
borrowings, measured immediately after issuance of the Fund Preferred Shares.
'Liquidation value' means the original purchase price of the shares being
liquidated plus any accrued and unpaid dividends. In addition, the Fund is not
permitted to declare any cash dividend or other distribution on its Common
Shares unless the liquidation value of the Fund Preferred Shares is less than
one-half of the value of the Fund's total assets less liabilities other than
borrowings (determined after deducting the amount of such dividend or
distribution) immediately after the distribution. If the Fund sells all the
Common Shares and Fund Preferred Shares discussed in this prospectus, the
liquidation value of the Fund Preferred Shares is expected to be approximately
33 1/3% of the value of the Fund's total assets less liabilities other than
borrowings. The Fund intends to purchase or redeem Fund Preferred Shares, if
necessary, to keep that fraction below one-half.

    Distribution Preference. The Fund Preferred Shares will have complete
priority over the Common Shares.

    Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
Fund Preferred Shares will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus
accumulated and unpaid dividends thereon, whether or not earned or declared)
before any distribution of assets is made to holders of Common Shares.

    Voting Rights. Fund Preferred Shares are required to be voting shares and to
have equal voting rights with Common Shares. Except as otherwise indicated in
this Prospectus or the SAI and except as otherwise required by applicable law,
holders of Fund Preferred Shares will vote together with Common Shareholders as
a single class.

    Holders of Fund Preferred Shares, voting as a separate class, will be
entitled to elect two of the Fund's Directors. The remaining Directors will be
elected by Common Shareholders and holders of Fund Preferred Shares, voting
together as a single class. In the unlikely event that two full years of accrued
dividends are unpaid on the Fund Preferred Shares, the holders of all
outstanding Fund Preferred Shares, voting as a separate class, will be entitled
to elect a majority of the Fund's Directors until all dividends in arrears have
been paid or declared and set apart for payment. In order for the Fund to take
certain actions or enter into certain transactions, a separate class vote of
holders of Fund Preferred Shares will be required, in addition to the combined
single class vote of the holders of Fund Preferred Shares and Common Shares.

    Redemption, Purchase and Sale of Fund Preferred Shares. The terms of the
Fund Preferred Shares may provide that they are redeemable at certain times, in
whole or in part, at the original purchase price per share plus accumulated
dividends. The terms may also state that the Fund may tender for or purchase
Fund Preferred Shares and resell any shares so tendered. Any redemption

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<Page>
or purchase of Fund Preferred Shares by the Fund will reduce the leverage
applicable to Common Shares, while any resale of shares by the Fund will
increase such leverage. See 'Use of Leverage.'

    The discussion above describes the Board of Directors' present intention
with respect to a possible offering of Fund Preferred Shares. If the Board of
Directors determines to authorize such an offering, the terms of the Fund
Preferred Shares may be the same as, or different from, the terms described
above, subject to applicable law and the Fund's Articles of Incorporation.

        CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BY-LAWS

    The Fund has provisions in its Articles of Incorporation and By-Laws that
could have the effect of limiting the ability of other entities or persons to
acquire control of the Fund, to cause it to engage in certain transactions or to
modify its structure. Commencing with the first annual meeting of shareholders,
the Board of Directors will be divided into three classes, having initial terms
of one, two and three years, respectively. At the annual meeting of shareholders
in each year thereafter, the term of one class will expire and directors will be
elected to serve in that class for terms of three years. This provision could
delay for up to two years the replacement of a majority of the Board of
Directors. A director may be removed from office only for cause and only by a
vote of the holders of at least 75% of the outstanding shares of the Fund
entitled to vote on the matter.

    The affirmative vote of at least 75% of the entire Board of Directors is
required to authorize the conversion of the Fund from a closed-end to an
open-end investment company. Such conversion also requires the affirmative vote
of the holders of at least 75% of the votes entitled to be cast thereon by the
shareholders of the Fund unless it is approved by a vote of at least 75% of the
Continuing Directors (as defined below), in which event such conversion requires
the approval of the holders of a majority of the votes entitled to be cast
thereon by the shareholders of the Fund. A 'Continuing Director' is any member
of the Board of Directors of the Fund who (i) is not a person or affiliate of a
person who enters or proposes to enter into a Business Combination (as defined
below) with the Fund (an 'Interested Party') and (ii) who has been a member of
the Board of Directors of the Fund for a period of at least 12 months, or has
been a member of the Board of Directors since the Fund's initial public offering
of Common Shares, or is a successor of a Continuing Director who is unaffiliated
with an Interested Party and is recommended to succeed a Continuing Director by
a majority of the Continuing Directors then on the Board of Directors of the
Fund. The affirmative vote of at least 75% of the votes entitled to be cast
thereon by shareholders of the Fund will be required to amend the Articles of
Incorporation to change any of the provisions in this paragraph and the
preceding paragraph.

    The affirmative votes of at least 75% of the entire Board of Directors and
the holders of at least (i) 80% of the votes entitled to be cast thereon by the
shareholders of the Fund and (ii) in the case of a Business Combination (as
defined below), 66 2/3% of the votes entitled to be cast thereon by the
shareholders of the Fund other than votes held by an Interested Party who is (or
whose affiliate is) a party to a Business Combination (as defined below) or an
affiliate or associate of the Interested Party, are required to authorize any of
the following transactions:

        (i) merger, consolidation or statutory share exchange of the Fund with
    or into any other entity;

        (ii) issuance or transfer by the Fund (in one or a series of
    transactions in any 12-month period) of any securities of the Fund to any
    person or entity for cash, securities or other

                                       59




<Page>
    property (or combination thereof) having an aggregate fair market value of
    $1,000,000 or more, excluding (a) issuances or transfers of debt securities
    of the Fund, (b) sales of securities of the Fund in connection with a public
    offering, (c) issuances of securities of the Fund pursuant to a dividend
    reinvestment plan adopted by the Fund, (d) issuances of securities of the
    Fund upon the exercise of any stock subscription rights distributed by the
    Fund and (e) portfolio transactions effected by the Fund in the ordinary
    course of business;

        (iii) sale, lease, exchange, mortgage, pledge, transfer or other
    disposition by the Fund (in one or a series of transactions in any 12 month
    period) to or with any person or entity of any assets of the Fund having an
    aggregate fair market value of $1,000,000 or more except for portfolio
    transactions (including pledges of portfolio securities in connection with
    borrowings) effected by the Fund in the ordinary course of its business
    (transactions within clauses (i), (ii) and (iii) above being known
    individually as a 'Business Combination');

        (iv) any voluntary liquidation or dissolution of the Fund or an
    amendment to the Fund's Articles of Incorporation to terminate the Fund's
    existence; or

        (v) any shareholder proposal as to specific investment decisions made or
    to be made with respect to the Fund's assets as to which shareholder
    approval is required under federal or Maryland law.

    However, the shareholder vote described above will not be required with
respect to the foregoing transactions (other than those set forth in (v) above)
if they are approved by a vote of at least 75% of the Continuing Directors (as
defined above). In that case, if Maryland law requires shareholder approval, the
affirmative vote of a majority of votes entitled to be cast thereon shall be
required and if Maryland law does not require shareholder approval, no
shareholder approval will be required. The Fund's By-Laws contain provisions the
effect of which is to prevent matters, including nominations of directors, from
being considered at a shareholders' meeting where the Fund has not received
notice of the matters generally at least 90 but no more than 120 days prior to
the first anniversary of the preceding year's annual meeting.

    The Board of Directors has determined that the foregoing voting
requirements, which are generally greater than the minimum requirements under
Maryland law and the 1940 Act, are in the best interest of the Fund's
shareholders generally.

    Reference is made to the Articles of Incorporation and By-Laws of the Fund,
on file with the Commission, for the full text of these provisions. These
provisions could have the effect of depriving shareholders of an opportunity to
sell their shares at a premium over prevailing market prices by discouraging a
third party from seeking to obtain control of the Fund in a tender offer or
similar transaction. On the other hand, these provisions may require persons
seeking control of a Fund to negotiate with its management regarding the price
to be paid for the shares required to obtain such control, they promote
continuity and stability and they enhance the Fund's ability to pursue long-term
strategies that are consistent with its investment objectives.

                                       60







<Page>
                                  UNDERWRITING

    Subject to the terms and conditions stated in the underwriting agreement
dated           , 2003 each underwriter named below has severally agreed to
purchase, and the Fund has agreed to sell to such underwriter, the number of
Common Shares set forth opposite the name of such underwriter.

<Table>
<Caption>
                                                                NUMBER OF
                                                              COMMON SHARES
UNDERWRITER                                                   -------------
<S>                                                           <C>

                                                                 ------
           Total............................................
                                                                 ------
                                                                 ------
</Table>

    The underwriting agreement provides that the obligations of the underwriters
to purchase the shares included in this offering are subject to the approval of
certain legal matters by counsel and to certain other conditions. The
underwriters are obligated to purchase all the Common Shares sold under the
purchase agreement if any of the Common Shares are purchased. In the
underwriting agreement, the Fund and the Investment Manager have agreed to
indemnify the underwriters against certain liabilities, including liabilities
arising under the Securities Act of 1933, or to contribute payments the
underwriters may be required to make for any of those liabilities.

    The underwriters propose to initially offer some of the Common Shares
directly to the public at the public offering price set forth on the cover page
of this prospectus and some of the Common Shares to certain dealers at the
public offering price less a concession not in excess of $   per share. The
sales load investors in the Fund will pay of $   per share is equal to   % of
the initial offering price. The underwriters may allow, and the dealers may
reallow, a discount not in excess of $   per share on sales to other dealers.
After the initial public offering, the public offering price, concession and
discount may be changed.

                                       61




<Page>
    The following table shows the public offering price, sales load and proceeds
before expenses to the Fund. The information assumes either no exercise or full
exercise by the underwriters of their over-allotment option.

<Table>
<Caption>
                                                   PER SHARE   WITHOUT OPTION   WITH OPTION
                                                   ---------   --------------   -----------
<S>                                                <C>         <C>              <C>
Public offering price............................   $25.00          $               $
Sales load.......................................   $               $               $
Estimated offering expense.......................   $               $               $
Proceeds, before expenses, to the Fund...........   $               $               $
</Table>

    The expenses of the offering are estimated at           and are payable by
the Fund. The Investment Manager has agreed to pay (i) all organizational
expenses and (ii) offering costs of the Fund (other than sales load) that exceed
$0.03 per share of the Fund's Common Shares.

    The Fund has granted the underwriters an option to purchase up to
additional Common Shares at the public offering price, less the sales load,
within 45 days from the date of this prospectus solely to cover any
over-allotments. If the underwriters exercise this option, each will be
obligated, subject to conditions contained in the purchase agreement, to
purchase a number of additional shares proportionate to that underwriter's
initial amount reflected in the above table.

    Until the distribution of the Common Shares is complete, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
Common Shares. However, the representatives may engage in transactions that
stabilize the price of our Common Shares, such as bids or purchases to peg, fix
or maintain that price.

    If the underwriters create a short position in our Common Shares in
connection with the offering, i.e., if they sell more Common Shares than are
listed on the cover of this prospectus, the representatives may reduce that
short position by purchasing Common Shares in the open market. The
representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described above. Purchases of our Common
Shares to stabilize its price or to reduce a short position may cause the price
of our Common Shares to be higher than it might be in the absence of such
purchases.

    Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transaction
described above may have on the price of our Common Shares. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will engage in these transactions or that these transactions, once commenced,
will not be discontinued without notice.

    The Fund has agreed not to offer or sell any additional Common Shares for a
period of 180 days after the date of the purchase agreement without the prior
written consent of the underwriters, except for the sale of the Common Shares to
the underwriters pursuant to the underwriting agreement.

    The Fund anticipates that the underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transactions after they
have ceased to be underwriters. The underwriters are active underwriters of, and
dealers in, securities and act as market makers in a number of such securities,
and therefore can be expected to engage in portfolio transactions with the Fund.

                                       62




<Page>
       CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR

    State Street Bank and Trust Company, whose principal business address is 225
Franklin Street, Boston, MA 02110, has been retained to act as custodian of the
Fund's investments and EquiServe Trust Company, NA, whose principal business
address is 150 Royall Street, Canton, MA 02021 to serve as the Fund's transfer
and dividend disbursing agent and registrar. Neither State Street Bank nor
EquiServe Trust Company, NA has any part in deciding the Fund's investment
policies or which securities are to be purchased or sold for the Fund's
portfolio.

                            REPORTS TO SHAREHOLDERS

    The Fund will send unaudited semi-annual and audited annual reports to its
shareholders, including a list of investments held.

                             VALIDITY OF THE SHARES

    The validity of the shares offered hereby is being passed on for the Fund by
Simpson Thacher & Bartlett, New York, New York, and certain other legal matters
will be passed on for the underwriters by                                   ,
New York, New York. Venable, Baetjer and Howard, LLP will opine on certain
matters pertaining to Maryland law. Simpson Thacher & Bartlett and
                                  may rely as to certain matters of Maryland law
on the opinion of Venable, Baetjer and Howard, LLP.

                                       63







<Page>
          TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION

<Table>
<S>                                                           <C>
Investment Objectives and Policies..........................     3
Use of Leverage.............................................     8
Investment Restrictions.....................................    11
Management of the Fund......................................    13
Compensation of Directors and Certain Officers..............    15
Investment Advisory and Other Services......................    16
Portfolio Transactions and Brokerage........................    18
Determination of Net Asset Value............................    19
Repurchase of Shares........................................    19
Taxation....................................................    21
Performance Information.....................................    25
Counsel and Independent Accountants.........................    26
Additional Information......................................    26
Statement of Assets and Liabilities.........................    27
Ratings of Investments (Appendix A).........................   A-1
</Table>

                                       64




<Page>


                      [THIS PAGE INTENTIONALLY LEFT BLANK]






<Page>


                      [THIS PAGE INTENTIONALLY LEFT BLANK]







<Page>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

                                            SHARES

                             [COHEN & STEERS LOGO]

                                 COMMON SHARES

                               ------------------

                                   PROSPECTUS

                               ------------------

                                          , 2003

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------







<Page>
                SUBJECT TO COMPLETION, DATED              , 2003

    THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION ('STATEMENT OF
ADDITIONAL INFORMATION') IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL
THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION IS EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS
NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

                             [COHEN & STEERS LOGO]

                                757 THIRD AVENUE
                            NEW YORK, NEW YORK 10017
                                 (800) 437-9912

- --------------------------------------------------------------------------------

                      STATEMENT OF ADDITIONAL INFORMATION

                                          , 2003

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS OF COHEN & STEERS REIT AND PREFERRED BALANCED
  INCOME FUND, INC., DATED           , 2003, AS SUPPLEMENTED FROM TIME TO TIME
(THE 'PROSPECTUS'). THIS STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED BY
   REFERENCE IN ITS ENTIRETY INTO THE PROSPECTUS. COPIES OF THE STATEMENT OF
ADDITIONAL INFORMATION AND PROSPECTUS MAY BE OBTAINED FREE OF CHARGE BY WRITING
              OR CALLING THE ADDRESS OR PHONE NUMBER SHOWN ABOVE.

- --------------------------------------------------------------------------------







<Page>
                               TABLE OF CONTENTS

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Investment Objectives and Policies..........................    3
Use of Leverage.............................................    8
Investment Restrictions.....................................   11
Management of the Fund......................................   13
Compensation of Directors and Certain Officers..............   15
Investment Advisory and Other Services......................   16
Portfolio Transactions and Brokerage........................   18
Determination of Net Asset Value............................   19
Repurchase of Shares........................................   19
Taxation....................................................   21
Performance Information.....................................   25
Counsel and Independent Accountants.........................   26
Additional Information......................................   26
Statement of Assets and Liabilities.........................   27
Ratings of Investments (Appendix A).........................  A-1
</Table>

                                       2







<Page>
                      STATEMENT OF ADDITIONAL INFORMATION

    Cohen & Steers REIT and Preferred Balanced Income Fund, Inc. (the 'Fund') is
a recently organized, non-diversified, closed-end management investment company
organized as a Maryland corporation on March   , 2003. Much of the information
contained in this Statement of Additional Information expands on subjects
discussed in the Prospectus. Defined terms used herein have the same meanings as
in the Prospectus. No investment in the shares of the Fund should be made
without first reading the Prospectus.

                       INVESTMENT OBJECTIVES AND POLICIES
               ADDITIONAL INFORMATION REGARDING FUND INVESTMENTS

    The following descriptions supplement the descriptions of the principal
investment objectives, strategies and risks as set forth in the Prospectus.
Except as otherwise provided, the Fund's investment policies are not fundamental
and may be changed by the Board of Directors of the Fund without the approval of
the shareholders; however, the Fund will not change its non-fundamental
investment policies without written notice to shareholders.

INVESTMENTS IN REAL ESTATE COMPANIES AND REAL ESTATE INVESTMENT TRUSTS

    Under normal market conditions, we will invest at least 40% of our total
assets in common stocks issued by real estate companies, such as real estate
investment trusts ('REITs').

REAL ESTATE COMPANIES

    For purposes of our investment policies, a real estate company is one that
derives at least 50% of its revenues from the ownership, construction,
financing, management or sale of commercial, industrial, or residential real
estate; or has at least 50% of its assets in such real estate.

REAL ESTATE INVESTMENT TRUSTS

    A REIT is a company dedicated to owning, and usually operating, income
producing real estate, or to financing real estate. REITs can generally be
classified as Equity REITs, Mortgage REITs and Hybrid REITs. An Equity REIT
invests primarily in the fee ownership or leasehold ownership of land and
buildings and derives its income primarily from rental income. An Equity REIT
may also realize capital gains (or losses) by selling real estate properties in
its portfolio that have appreciated (or depreciated) in value. A Mortgage REIT
invests primarily in mortgages on real estate, which may secure construction,
development or long-term loans. A Mortgage REIT generally derives its income
primarily from interest payments on the credit it has extended. A Hybrid REIT
combines the characteristics of both Equity REITs and Mortgage REITs. It is
anticipated, although not required, that under normal market conditions at least
90% of the Fund's investments in REITs will consist of securities issued by
Equity REITs.

PREFERRED SECURITIES

    Under normal market conditions, the Fund will invest at least 40% of its
total assets in preferred securities. Initially, the preferred component of the
Fund will be comprised primarily of hybrid-preferred and other taxable preferred
securities. The taxable preferred securities in which the Fund intends to invest
do not qualify for the dividends received deduction (the 'DRD') under
Section 243 of the Internal Revenue Code of 1986, as amended (the 'Code'). The
DRD generally allows corporations to deduct from their income 70% of dividends
received. Accordingly, any corporate shareholder who otherwise would qualify for
the DRD should assume that none of the distributions it receives from the Fund
will qualify for the DRD.

    There are two basic types of preferred securities: traditional preferred
securities and hybrid-preferred securities. When used in this SAI and the
related prospectus, taxable preferred securities refer generally to
hybrid-preferred securities as well as certain types of traditional
preferred securities that are not eligible for the DRD, such as
REIT preferred securities.



                                       3




<Page>
TRADITIONAL PREFERRED SECURITIES

    Traditional preferred securities pay fixed or adjustable rate dividends to
investors, and have a 'preference' over common stock in the payment of dividends
and the liquidation of a company's assets. This means that a company must pay
dividends on preferred stock before paying any dividends on its common stock. In
order to be payable, distributions on preferred securities must be declared by
the issuer's board of directors. Income payments on typical preferred securities
currently outstanding are cumulative, causing dividends and distributions to
accrue even if not declared by the board of directors or otherwise made payable.
There is no assurance that dividends or distributions on the preferred
securities in which the Fund invests will be declared or otherwise made payable.
Preferred stockholders usually have no right to vote for corporate directors or
on other matters. Shares of preferred securities have a liquidation value that
generally equals the original purchase price at the date of issuance. The market
value of preferred securities may be affected by favorable and unfavorable
changes impacting companies in the utilities, real estate and financial services
sectors, which are prominent issuers of preferred securities, and by actual and
anticipated changes in tax laws, such as changes in corporate income tax rates
and in the DRD. Because the claim on an issuer's earnings represented by
preferred securities may become onerous when interest rates fall below the
rate payable on such securities, the issuer may redeem the securities. Thus,
in declining interest rate environments in particular, the Fund's holdings
of higher rate-paying fixed rate preferred securities may be reduced and
the Fund would be unable to acquire securities paying comparable rates
with the redemption proceeds.

HYBRID-PREFERRED SECURITIES

    The hybrid-preferred securities market is divided into the '$25 par' and the
'institutional' segments. The $25 par segment is typified by securities that are
listed on the New York Stock Exchange, trade and are quoted 'flat,' i.e.,
without accrued dividend income, and are typically callable at par value five
years after their original issuance date. The institutional segment is typified
by $1,000 par value securities that are not exchange-listed, trade and are
quoted on an 'accrued income' basis, and typically have a minimum of 10 years of
call protection (at premium prices) from the date of their original issuance.

    Hybrid-preferred securities are treated in a similar fashion to traditional
preferred securities by several regulatory agencies, including the Federal
Reserve Bank, and by credit rating agencies, for various purposes, such as the
assignment of minimum capital ratios, over-collateralization rates and
diversification limits.

    Within the category of hybrid-preferred securities are senior debt
instruments that trade in the broader preferred securities market. These debt
instruments, which are sources of long-term capital for the issuers, have
structural features similar to preferred stock such as maturities ranging from
30 years to perpetuity, call features, exchange listings and the inclusion of
accrued interest in the trading price. Similar to other hybrid-preferred
securities, these debt instruments usually do not offer equity capital
treatment. CORTS'r' and PINES'r' are two examples of senior debt instruments
which are structured and trade as hybrid-preferred securities.

    See 'Investment Objectives and Policies -- Initial Portfolio
Composition -- Hybrid-Preferred Securities' in the Fund's prospectus for a
general description of hybrid-preferred securities.

SHORT-TERM FIXED INCOME SECURITIES

    For temporary defensive purposes or to keep cash on hand fully invested, and
following the offering pending investment in securities that meet the Fund's
investment objectives, the Fund may invest up to 100% of its total assets in
cash equivalents and short-term fixed income securities. Short-term fixed income
investments are defined to include, without limitation, the following:

    (1) U.S. Government securities, including bills, notes and bonds differing
        as to maturity and rates of interest that are either issued or
        guaranteed by the U.S. Treasury or by U.S. Government agencies or
        instrumentalities. U.S. Government securities include securities

                                       4




<Page>
        issued by (a) the Federal Housing Administration, Farmers Home
        Administration, Export-Import Bank of the United States, Small Business
        Administration, and Government National Mortgage Association, whose
        securities are supported by the full faith and credit of the United
        States; (b) the Federal Home Loan Banks, Federal Intermediate Credit
        Banks, and Tennessee Valley Authority, whose securities are supported by
        the right of the agency to borrow from the U.S. Treasury; (c) the
        Federal National Mortgage Association, whose securities are supported by
        the discretionary authority of the U.S. Government to purchase certain
        obligations of the agency or instrumentality; and (d) the Student Loan
        Marketing Association, whose securities are supported only by its
        credit. While the U.S. Government provides financial support to such
        U.S. Government-sponsored agencies or instrumentalities, no assurance
        can be given that it always will do so since it is not so obligated by
        law. The U.S. Government, its agencies and instrumentalities do not
        guarantee the market value of their securities. Consequently, the value
        of such securities may fluctuate.

    (2) Certificates of deposit issued against funds deposited in a bank or a
        savings and loan association. Such certificates are for a definite
        period of time, earn a specified rate of return, and are normally
        negotiable. The issuer of a certificate of deposit agrees to pay the
        amount deposited plus interest to the bearer of the certificate on the
        date specified thereon. Certificates of deposit purchased by the Trust
        may not be fully insured by the Federal Deposit Insurance Corporation.

    (3) Repurchase agreements, which involve purchases of debt securities. At
        the time the Fund purchases securities pursuant to a repurchase
        agreement, it simultaneously agrees to resell and redeliver such
        securities to the seller, who also simultaneously agrees to buy back the
        securities at a fixed price and time. This assures a predetermined yield
        for the Fund during its holding period, since the resale price is always
        greater than the purchase price and reflects an agreed-upon market rate.
        Such actions afford an opportunity for the Fund to invest temporarily
        available cash. The Fund may enter into repurchase agreements only with
        respect to obligations of the U.S. Government, its agencies or
        instrumentalities; certificates of deposit; or bankers' acceptances in
        which the Fund may invest. Repurchase agreements may be considered loans
        to the seller, collateralized by the underlying securities. The risk to
        the Fund is limited to the ability of the seller to pay the agreed-upon
        sum on the repurchase date; in the event of default, the repurchase
        agreement provides that the Fund is entitled to sell the underlying
        collateral. If the value of the collateral declines after the agreement
        is entered into, and if the seller defaults under a repurchase agreement
        when the value of the underlying collateral is less than the repurchase
        price, the Fund could incur a loss of both principal and interest. The
        Investment Manager monitors the value of the collateral at the time the
        action is entered into and at all times during the term of the
        repurchase agreement. The Investment Manager does so in an effort to
        determine that the value of the collateral always equals or exceeds the
        agreed-upon repurchase price to be paid to the Fund. If the seller were
        to be subject to a Federal bankruptcy proceeding, the ability of the
        Fund to liquidate the collateral could be delayed or impaired because of
        certain provisions of the bankruptcy laws.

    (4) Commercial paper, which consists of short-term unsecured promissory
        notes, including variable rate master demand notes issued by
        corporations to finance their current operations. Master demand notes
        are direct lending arrangements between the Fund and a corporation.
        There is no secondary market for such notes. However, they are
        redeemable by the Fund at any time.

    The Investment Manager will consider the financial condition of the
corporation (e.g., earning power, cash flow and other liquidity ratios) and will
continuously monitor the corporation's ability to meet all of its financial
obligations, because the Fund's liquidity might be impaired if the corporation
were unable to pay principal and interest on demand. Investments in commercial
paper will be limited to commercial paper rated in the two highest categories by
a major rating agency

                                       5




<Page>
or are unrated but determined to be of comparable quality by the Investment
Manager and which mature within one year of the date of purchase or carry a
variable or floating rate of interest.

LOWER RATED SECURITIES

    The Fund may invest up to 5% of its total assets (measured at the time of
purchase) in securities rated below investment grade. Preferred stock
or debt securities will be considered to be investment grade if, at the
time of the investment, such security has a rating of 'BBB' or higher by S&P,
'Baa' or higher by Moody's or an equivalent rating by a nationally recognized
statistical rating agency or, if unrated, such security is determined by the
Investment Manager to be of comparable quality. Securities rated Ba by Moody's
are judged to have speculative elements; their future cannot be considered as
well assured and often the protection of interest and principle payments may be
very moderate. Securities rated BB by S&P are regarded as having predominantly
speculative characteristics and, while such obligations have less near-term
vulnerability to default than other speculative grade debt, they face major
ongoing uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest and
principal payments.

OTHER INVESTMENT COMPANIES

    The Fund may invest up to 10% of its total assets in securities of other
open- or closed-end investment companies that invest primarily in securities of
the types in which the Fund may invest directly. The Fund generally expects to
invest in other investment companies either during periods when it has large
amounts of uninvested cash, such as the period shortly after the Fund receives
the proceeds of the offering of its common shares, or during periods when there
is a shortage of attractive opportunities in the market. As a shareholder in an
investment company, the Fund would bear its ratable share of that investment
company's expenses, and would remain subject to payment of the Fund's advisory
and other fees and expenses with respect to assets so invested. Holders of
common shares would therefore be subject to duplicative expenses to the extent
the Trust invests in other investment companies. The Investment Manager will
take expenses into account when evaluating the investment merits of an
investment in an investment company relative to available bond investments. The
securities of other investment companies may also be leveraged and will
therefore be subject to the same leverage risks to which the Fund is subject. As
described in the prospectus in the sections entitled and 'Use of Leverage' and
'Leverage Risks,' the net asset value and market value of leveraged shares will
be more volatile and the yield to shareholders will tend to fluctuate more than
the yield generated by unleveraged shares. Investment companies may have
investment policies that differ from those of the Fund. In addition, to the
extent the Fund invests in other investment companies, the Fund will be
dependent upon the investment and research abilities of persons other than the
Investment Manager. The Fund treats its investments in such open- or closed-end
investment companies as investments in bonds.

RESTRICTED AND ILLIQUID SECURITIES

    When purchasing securities that have not been registered under the
Securities Act, and are not readily marketable, the Fund will endeavor, to the
extent practicable, to obtain the right to registration at the expense of the
issuer. Generally, there will be a lapse of time between the Fund's decision to
sell any such security and the registration of the security permitting sale.
During any such period, the price of the securities will be subject to market
fluctuations. In addition, the Fund may not be able to readily dispose of such
securities at prices that approximate those at which the Fund could sell such
securities if they were more widely traded and, as a result of such illiquidity,
the Fund may have to sell other investments or engage in borrowing transactions
if necessary to raise cash to meet its obligations.

    The Fund may purchase certain securities eligible for resale to qualified
institutional buyers as contemplated by Rule 144A under the Securities Act
('Rule 144A Securities'). Rule 144A

                                       6




<Page>
provides an exemption from the registration requirements of the Securities Act
for the resale of certain restricted securities to certain qualified
institutional buyers. One effect of Rule 144A is that certain restricted
securities may be considered liquid, though no assurance can be given that a
liquid market for Rule 144A Securities will develop or be maintained. However,
where a substantial market of qualified institutional buyers has developed for
certain unregistered securities purchased by the Fund pursuant to Rule 144A, the
Fund intends to treat such securities as liquid securities in accordance with
procedures approved by the Fund's Board of Directors. Because it is not possible
to predict with assurance how the market for Rule 144A Securities will develop,
the Fund's Board of Directors has directed the Investment Manager to monitor
carefully the Fund's investments in such securities with particular regard to
trading activity, availability of reliable price information and other relevant
information. To the extent that, for a period of time, qualified institutional
buyers cease purchasing restricted securities pursuant to Rule 144A, the Fund's
investing in such securities may have the effect of increasing the level of
illiquidity in its investment portfolio during such period.

WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES

    The Fund may purchase securities on a 'when-issued' basis and may purchase
or sell securities on a 'forward commitment' basis in order to acquire the
security or to hedge against anticipated changes in interest rates and prices.
When such transactions are negotiated, the price, which is generally expressed
in yield terms, is fixed at the time the commitment is made, but delivery and
payment for the securities take place at a later date. When-issued securities
and forward commitments may be sold prior to the settlement date, but the Fund
will enter into when-issued and forward commitments only with the intention of
actually receiving or delivering the securities, as the case may be. If the Fund
disposes of the right to acquire a when-issued security prior to its acquisition
or disposes of its right to deliver or receive against a forward commitment, it
might incur a gain or loss. At the time the Fund enters into a transaction on a
when-issued or forward commitment basis, it will designate on its books and
records cash or liquid debt securities equal to at least the value of the
when-issued or forward commitment securities. The value of these assets will be
monitored daily to ensure that their marked to market value will at all times
equal or exceed the corresponding obligations of the Fund. There is always a
risk that the securities may not be delivered and that the Fund may incur a
loss. Settlements in the ordinary course, which may take substantially more than
three business days, are not treated by the Fund as when-issued or forward
commitment transactions and accordingly are not subject to the foregoing
restrictions.

    Securities purchased on a forward commitment or when-issued basis are
subject to changes in value (generally changing in the same way, i.e.,
appreciating when interest rates decline and depreciating when interest rates
rise) based upon the public's perception of the creditworthiness of the issuer
and changes, actual or anticipated, in the level of interest rates. Securities
purchased with a forward commitment or when-issued basis may expose the Fund to
risks because they may experience such fluctuations prior to their actual
delivery. Purchasing securities on a when-issued basis can involve the
additional risks that the yield available in the market when the delivery takes
place actually may be higher than that obtained in the transaction itself.
Purchasing securities on a forward commitment or when-issued basis when the Fund
is fully invested may result in greater potential fluctuation in the value of
the Fund's net assets and its net asset value per share.

REVERSE REPURCHASE AGREEMENTS

    The Fund may enter into reverse repurchase agreements with respect to its
portfolio investments subject to the investment restrictions set forth herein.
Reverse repurchase agreements involve the sale of securities held by the Fund
with an agreement by the Fund to repurchase the securities at an agreed upon
price, date and interest payment. The use by the Fund of reverse repurchase
agreements involves many of the same risks of leverage described under 'Risks --
Leverage Risk,' since the proceeds derived from such reverse repurchase
agreements may be invested in additional securities. At the time the Fund enters
into a reverse repurchase agreement,

                                       7




<Page>
it may designate on its books and records liquid instruments having a value not
less than the repurchase price (including accrued interest). If the Fund
designates liquid instruments on its books and records, a reverse repurchase
agreement will not be considered a borrowing by the Fund; however, under
circumstances in which the Fund does not designate liquid instruments on its
books and records, such reverse repurchase agreement will be considered a
borrowing for the purpose of the Fund's limitation on borrowings. Reverse
repurchase agreements involve the risk that the market value of the securities
acquired in connection with the reverse repurchase agreement may decline below
the price of the securities the Fund has sold but is obligated to repurchase.
Also, reverse repurchase agreements involve the risk that the market value of
the securities retained in lieu of sale by the Fund in connection with the
reverse repurchase agreement may decline in price.

    If the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision. Also, the Fund would bear the risk of loss to the extent that the
proceeds of the reverse repurchase agreement are less than the value of the
securities subject to such agreement.

CASH RESERVES

    The Fund's cash reserves, held to provide sufficient flexibility to take
advantage of new opportunities for investments and for other cash needs, will be
invested in money market instruments.

    Money market instruments in which the Fund may invest its cash reserves will
generally consist of obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and such obligations which are subject to
repurchase agreements. Repurchase agreements may be entered into with member
banks of the Federal Reserve System or 'primary dealers' (as designated by the
Federal Reserve Bank of New York) in U.S. Government securities. Other
acceptable money market instruments include commercial paper rated by any
nationally recognized rating agency, such as Moody's or S&P, certificates of
deposit, bankers' acceptances issued by domestic banks having total assets in
excess of one billion dollars, and money market mutual funds.

    In entering into a repurchase agreement for the Fund, the Investment Manager
will evaluate and monitor the creditworthiness of the vendor. In the event that
a vendor should default on its repurchase obligation, the Fund might suffer a
loss to the extent that the proceeds from the sale of the collateral were less
than the repurchase price. If the vendor becomes bankrupt, the Fund might be
delayed, or may incur costs or possible losses of principal and income, in
selling the collateral.

                                USE OF LEVERAGE

    Subject to market conditions and the Fund's receipt of AAA/aaa credit rating
on the Fund Preferred Shares, approximately one to three months after the
completion of the offering of the Common Shares, the Fund intends to offer Fund
Preferred Shares representing approximately 33 1/3% of the Fund's capital
immediately after their issuance. The issuance of Fund Preferred Shares will
leverage the Common Shares. As an alternative to the Fund Preferred Shares, the
Fund may leverage through borrowings. Any borrowings will have seniority over
the Common Shares.

    Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless immediately after the issuance the value of the Fund's total assets is at
least 200% of the liquidation value of the outstanding preferred shares (i.e.,
such liquidation value may not exceed 50% of the Fund's total assets less
liabilities other than borrowing). In addition, the Fund is not permitted to
declare any cash dividend or other distribution on its Common Shares unless, at
the time of such declaration, the value of the Fund's total assets less
liabilities other than borrowing is at least

                                       8




<Page>
200% of such liquidation value. If Fund Preferred Shares are issued, the Fund
intends, to the extent possible, to purchase or redeem Fund Preferred Shares
from time to time to the extent necessary in order to maintain coverage of any
Fund Preferred Shares of at least 200%. If the Fund has Fund Preferred Shares
outstanding, two of the Fund's Directors will be elected by the holders of Fund
Preferred Shares, voting separately as a class. The remaining Directors of the
Fund will be elected by holders of Common Shares and Fund Preferred Shares
voting together as a single class. In the event the Fund failed to pay dividends
on Fund Preferred Shares for two years, Fund Preferred Shareholders would be
entitled to elect a majority of the Directors of the Fund. The failure to pay
dividends or make distributions could result in the Fund ceasing to qualify as a
regulated investment company under the Code, which could have a material adverse
effect on the value of the Common Shares. See 'Description of Shares -- Fund
Preferred Shares' in the Prospectus.

    Under the 1940 Act, the Fund generally is not permitted to borrow unless
immediately after the borrowing the value of the Fund's total assets less
liabilities other than the borrowing is at least 300% of the principal amount of
such borrowing (i.e., such principal amount may not exceed 33 1/3% of the Fund's
total assets). In addition, the Fund is not permitted to declare any cash
dividend or other distribution on its Common Shares unless, at the time of such
declaration, the value of the Fund's total assets, less liabilities other than
the borrowings, is at least 300% of such principal amount. If the Fund borrows,
the Fund intends, to the extent possible, to prepay all or a portion of the
principal amount of the borrowing to the extent necessary in order to maintain
the required asset coverage. Failure to maintain certain asset coverage
requirements could result in an event of default and entitle the debt holders to
elect a majority of the board of directors.

    The Fund may be subject to certain restrictions imposed by either guidelines
of one or more rating agencies which may issue ratings for Fund Preferred Shares
or, if the Fund borrows from a lender, by the lender. These guidelines may
impose asset coverage or portfolio composition requirements that are more
stringent than those imposed on the Fund by the 1940 Act. It is not anticipated
that these covenants or guidelines will impede the Investment Manager from
managing the Fund's portfolio in accordance with the Fund's investment
objectives and policies. In addition to other considerations, to the extent that
the Fund believes that the covenants and guidelines required by the rating
agencies would impede its ability to meet its investment objectives, or if the
Fund is unable to obtain the rating on the Fund Preferred Shares (expected to be
AAA/aaa), the Fund will not issue the Fund Preferred Shares.

    During the time in which the Fund is utilizing leverage, the fees paid to
the Investment Manager for investment advisory and management services will be
higher than if the Fund did not utilize leverage because the fees paid will be
calculated based on the Fund's managed assets. Only the Fund's Common
Shareholders bear the cost of the Fund's fees and expenses.

    The Fund may also borrow money as a temporary measure for extraordinary or
emergency purposes, including the payment of dividends and the settlement of
securities transactions which otherwise might require untimely dispositions of
Fund securities.

LEVERAGE RISK

    Utilization of leverage is a speculative investment technique and involves
certain risks to the holders of Common Shares. These include the possibility of
higher volatility of the net asset value of the Common Shares and potentially
more volatility in the market value of the Common Shares. So long as the Fund is
able to realize a higher net return on its investment portfolio than the then
current cost of any leverage together with other related expenses, the effect of
the leverage will be to cause holders of Common Shares to realize a higher
current net investment income than if the Fund were not so leveraged. On the
other hand, to the extent that the then current cost of any leverage, together
with other related expenses, approaches the net return on the Fund's investment
portfolio, the benefit of leverage to holders of Common Shares will be reduced,
and if the then current cost of any leverage were to exceed the net return on
the Fund's portfolio, the Fund's leveraged capital structure would result in a
lower rate of return to Common Shareholders than if the Fund were not so
leveraged.

                                       9




<Page>
    Any decline in the net asset value of the Fund's investments will be borne
entirely by Common Shareholders. Therefore, if the market value of the Fund's
portfolio declines, the leverage will result in a greater decrease in net asset
value to Common Shareholders than if the Fund were not leveraged. Such greater
net asset value decrease will also tend to cause a greater decline in the market
price for the Common Shares. To the extent that the Fund is required or elects
to redeem any Fund Preferred Shares or prepay any borrowings, the Fund may need
to liquidate investments to fund such redemptions or prepayments. Liquidation at
times of adverse economic conditions may result in capital loss and reduce
returns to Common Shareholders.

    In addition, such redemption or prepayment likely would result in the Fund
seeking to terminate early all or a portion of any swap or cap transaction.
Early termination of the swap could result in a termination payment by or to the
Fund. Early termination of a cap could result in a termination payment to the
Fund.

    Unless and until the borrowings for leverage or Fund Preferred Shares are
issued, the Common Shares will not be leveraged and the disclosure regarding
these strategies will not apply.

INTEREST RATE TRANSACTIONS

    In order to reduce the interest rate risk inherent in our underlying
investments and capital structure, we may enter into interest rate swap or cap
transactions. Interest rate swaps involve the Fund's agreement with the swap
counterparty to pay a fixed rate payment in exchange for the counterparty paying
the Fund a variable rate payment that is intended to approximate the Fund's
variable rate payment obligation on the Fund Preferred Shares or any variable
rate borrowing. The payment obligation would be based on the notional amount of
the swap. We may use an interest rate cap, which would require us to pay a
premium to the cap counterparty and would entitle us, to the extent that a
specified variable rate index exceeds a predetermined fixed rate, to receive
from the counterparty payment of the difference based on the notional amount. We
would use interest rate swaps or caps only with the intent to reduce or
eliminate the risk that an increase in short-term interest rates could have on
the performance of the Fund's Common Shares as a result of leverage.

    The use of interest rate swaps and caps is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio security transactions. Depending on the state of
interest rates in general, our use of interest rate swaps or caps could enhance
or harm the overall performance on the Fund's Common Shares. To the extent there
is a decline in interest rates, the value of the interest rate swap or cap could
decline, and could result in a decline in the net asset value of the Common
Shares. In addition, if short-term interest rates are lower than our rate of
payment on the interest rate swap, this will reduce the performance of the
Fund's Common Shares. If, on the other hand, short-term interest rates are
higher than our rate of payment on the interest rate swap, this will enhance the
performance of the Fund's Common Shares. Buying interest rate caps could enhance
the performance of the Fund's Common Shares by providing a ceiling on leverage
expenses. Buying interest rate caps could also decrease the net income of the
Fund's Common Shares in the event that the premium paid by the Fund to the
counterparty exceeds the additional amount the Fund would have been required to
pay had it not entered into the cap agreement. The Fund has no current intention
of selling an interest rate swap or cap. We would not enter into interest rate
swap or cap transactions in an aggregate notional amount that exceeds the
outstanding amount of the Fund's leverage.

    Interest rate swaps and caps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with respect
to interest rate swaps is limited to the net amount of interest payments that
the Fund is contractually obligated to make. If the counter-party defaults, the
Fund would not be able to use the anticipated net receipts under the swap or cap
to offset the dividend payments on the Fund Preferred Shares or rate of interest
on borrowings. Depending on whether the Fund would be entitled to receive net
payments from the counterparty on the swap or cap, which in turn would depend on
the general state of short-term interest rates at that point in time, such
default could negatively impact the performance of the Fund's Common Shares.
Although this will not guarantee that the counter-party does not default,

                                       10




<Page>
the Fund will not enter into an interest rate swap or cap transaction with any
counter-party that the Investment Manager believes does not have the financial
resources to honor its obligation under the interest rate swap or cap
transaction. Further, the Investment Manager will continually monitor the
financial stability of a counter-party to an interest rate swap or cap
transaction in an effort to proactively protect the Fund's investments. In
addition, at the time the interest rate swap or cap transaction reaches its
scheduled termination date, there is a risk that the Fund will not be able to
obtain a replacement transaction or that the terms of the replacement will not
be as favorable as on the expiring transaction. If this occurs, it could have a
negative impact on the performance of the Fund's Common Shares. The Fund will
usually enter into swaps or caps on a net basis; that is, the two payment
streams will be netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments.

    The Fund may choose or be required to redeem some or all of the Fund
Preferred Shares or prepay any borrowings. This redemption would likely result
in the Fund seeking to terminate early all or a portion of any swap or cap
transaction. Such early termination of a swap could result in termination
payment by or to the Fund. An early termination of a cap could result in a
termination payment to the Fund.

                            INVESTMENT RESTRICTIONS

    The investment objectives and the general investment policies and investment
techniques of the Fund are described in the Prospectus. The Fund has also
adopted certain investment restrictions limiting the following activities except
as specifically authorized:

    The Fund may not:

         1. Issue senior securities (including borrowing money for other than
    temporary purposes) except in conformity with the limits set forth in the
    1940 Act; or pledge its assets other than to secure such issuances or
    borrowings or in connection with permitted investment strategies;
    notwithstanding the foregoing, the Fund may borrow up to an additional 5% of
    its total assets for temporary purposes;

         2. Act as an underwriter of securities issued by other persons, except
    insofar as the Fund may be deemed an underwriter in connection with the
    disposition of securities;

         3. Purchase or sell real estate, mortgages on real estate or
    commodities, except that the Fund may invest in securities of companies that
    deal in real estate or are engaged in the real estate business, including
    REITs, and securities secured by real estate or interests therein and the
    Fund may hold and sell real estate or mortgages on real estate acquired
    through default, liquidation, or other distributions of an interest in real
    estate as a result of the Fund's ownership of such securities;

         4. Purchase or sell commodities or commodity futures contracts, except
    that the Fund may invest in financial futures contracts, options thereon and
    such similar instruments;

         5. Make loans to other persons except through the lending of securities
    held by it (but not to exceed a value of one-third of total assets), through
    the use of repurchase agreements, and by the purchase of debt securities;

         6. Purchase preferred stock and debt securities rated below investment
    grade and unrated securities of comparable quality, if, as a result, more
    than 5% of the Fund's total assets would then be invested in such
    securities;

         7. Acquire or retain securities of any investment company, except that
    the Fund may (a) acquire securities of investment companies up to the limits
    permitted by Section 12(d)(1) of the 1940 Act, and (b) acquire securities of
    any investment company as part of a merger, consolidation or similar
    transaction;

         8. Invest more than 25% of its total assets in securities of issuers in
    any one industry other than the real estate industry and financial services
    industry; provided, however, that such limitation shall not apply to
    obligations issued or guaranteed by the United States Government or by its
    agencies or instrumentalities;

         9. Invest in puts, calls, straddles, spreads or any combination
    thereof;

                                       11




<Page>
        10. Enter into short sales;

        11. Invest in oil, gas or other mineral exploration programs,
    development programs or leases, except that the Fund may purchase securities
    of companies engaging in whole or in part in such activities;

        12. Pledge, mortgage or hypothecate its assets except in connection with
    permitted borrowings; or

        13. Purchase securities on margin, except short-term credits as are
    necessary for the purchase and sale of securities.

    The investment restrictions numbered 1 through 8 in this Statement of
Additional Information have been adopted as fundamental policies of the Fund.
Under the 1940 Act, a fundamental policy may not be changed without the approval
of the holders of a 'majority of the outstanding' Common Shares and the Fund
Preferred Shares voting together as a single class, and of the holders of a
'majority of the outstanding' Fund Preferred Shares voting as a separate class.
When used with respect to particular shares of the Fund, a 'majority of the
outstanding' shares means (i) 67% or more of the shares present at a meeting, if
the holders of more than 50% of the shares are present or represented by proxy,
or (ii) more than 50% of the shares, whichever is less. Investment restrictions
numbered 9 through 13 above are non-fundamental and may be changed at any time
by vote of a majority of the Board of Directors.

                                       12







<Page>
                             MANAGEMENT OF THE FUND

    The business and affairs of the Fund are managed under the direction of the
Board of Directors. The Directors approve all significant agreements between the
Fund and persons or companies furnishing services to it, including the Fund's
agreements with its Investment Manager, administrator, custodian and transfer
agent. The management of the Fund's day-to-day operations is delegated to its
officers, the Investment Manager and the Fund's administrator, subject always to
the investment objectives and policies of the Fund and to the general
supervision of the Directors. As of March   , 2003, the Directors and officers
as a group beneficially owned, directly or indirectly, less than 1% of the
outstanding shares of the Fund.

    Basic information about the identity and experience of each Director and
officer is set forth in the charts below. Each such Director and officer is also
a director or officer of Cohen & Steers Advantage Income Realty Fund, Inc.,
Cohen & Steers Quality Income Realty Fund, Inc., Cohen & Steers Premium Income
Realty Fund, Inc. and Cohen & Steers Total Return Realty Fund, Inc., which are
closed-end investment companies advised by the Investment Manager, and Cohen &
Steers Equity Income Fund, Inc., Cohen & Steers Institutional Realty Shares,
Inc., Cohen & Steers Realty Shares, Inc. and Cohen & Steers Special Equity Fund,
Inc., which are open-end investment companies advised by the Investment Manager.

    The Directors of the Fund, their addresses, their ages, the length of time
served, their principal occupations for at least the past five years, the number
of portfolios they oversee within the Fund complex, and other directorships held
by the Director are set forth below.

<Table>
<Caption>
                                                                                     NUMBER OF
                                                                                    FUNDS WITHIN
                                                                 PRINCIPAL              FUND
                                                                 OCCUPATION            COMPLEX
                                                                 DURING PAST         OVERSEEN BY
                                                                   5 YEARS            DIRECTOR
                             POSITION HELD      TERM OF        (INCLUDING OTHER      (INCLUDING    LENGTH OF
NAME, ADDRESS AND AGE          WITH FUND         OFFICE       DIRECTORSHIPS HELD)     THE FUND    TIME SERVED
- ---------------------          ---------         ------       -------------------     --------    -----------
<S>                        <C>                 <C>               <C>                 <C>          <C>
INTERESTED DIRECTORS

Robert H. Steers ........  Director, Chairman  Until Next        Chairman of             9        Since
757 Third Avenue           of the Board, and   Election of       Cohen & Steers                   Inception
New York, New York             Secretary       Directors         Capital
Age: 50                                                          Management,
                                                                 Inc., the
                                                                 Fund's
                                                                 Investment
                                                                 Manager.

Martin Cohen ............      Director,       Until Next        President of            9        Since
757 Third Avenue             President and     Election of       Cohen & Steers                   Inception
New York, New York             Treasurer       Directors         Capital
Age: 54                                                          Management,
                                                                 Inc., the
                                                                 Fund's
                                                                 Investment
                                                                 Manager.
INDEPENDENT DIRECTORS
To be determined.
</Table>

                                       13




<Page>
    The officers of the Fund, their addresses, their ages, and their principal
occupations for at least the past five years are set forth below.

<Table>
<Caption>
                                    POSITION(S)
                                     HELD WITH
    NAME, ADDRESS AND AGE              FUND          PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
    ---------------------              ----          -------------------------------------------
<S>                             <C>                  <C>
Greg E. Brooks ...............  Vice President       Senior Vice President of Cohen & Steers
757 Third Avenue                                       Capital Management, Inc., the Fund's
New York, New York                                     Investment Manager, since 2002 and a Vice
Age: 36                                                President of the Fund's Investment
                                                       Manager since 2000. Prior thereto, he was
                                                       an investment analyst with another real
                                                       estate securities investment manager.

William F. Scapell ...........  Senior Vice          Senior Vice President of Cohen & Steers
757 Third Avenue                President              Capital Management, Inc., the Fund's
New York, New York                                     Investment Manager, since February 2003.
Age: 36                                                Prior thereto, he was the chief
                                                       strategist for preferred securities at
                                                       Merrill Lynch & Co.

Adam M. Derechin .............  Vice President and   Senior Vice President of Cohen & Steers
757 Third Avenue                Assistant Treasurer    Capital Management, Inc., the Fund's
New York, New York                                     Investment Manager, since 1998 and prior
Age: 38                                                to that Vice President of the Fund's
                                                       Investment Manager.

Lawrence B. Stoller ..........  Assistant Secretary  Senior Vice President and General Counsel
757 Third Avenue                                       of Cohen & Steers Capital Management,
New York, New York                                     Inc., the Fund's Investment Manager,
Age: 39                                                since 1999. Prior to that, Associate
                                                       General Counsel, Neuberger Berman
                                                       Management, Inc. (money manager); and
                                                       Assistant General Counsel, The Dreyfus
                                                       Corporation (money manager).
</Table>

    The following table provides information concerning the dollar range of the
Fund's equity securities owned by each Director and the aggregate dollar range
of securities owned in the Cohen & Steers Fund Complex is set forth below.

<Table>
<Caption>
                                                                                   AGGREGATE DOLLAR
                                                                                   RANGE OF EQUITY
                                                            DOLLAR RANGE OF       SECURITIES IN THE
                                                          EQUITY SECURITIES IN   COHEN & STEERS FUND
                                                             THE FUND AS OF         COMPLEX AS OF
                                                              MARCH , 2003           MARCH , 2003
                                                              ------------           ------------
<S>                                                       <C>                    <C>
Robert H. Steers........................................     over $100,000          over $100,000
Martin Cohen............................................     over $100,000          over $100,000
</Table>

    Conflicts of Interest. No Director who is not an 'interested person' of the
Fund as defined in the 1940 Act, and no immediate family members, owns any
securities issued by the Investment Manager, or any person or entity (other than
the Fund) directly or indirectly controlling, controlled by, or under common
control with the Investment Manager.

BOARD'S ROLE IN FUND GOVERNANCE

    Committees. The Fund's Board of Directors has one standing committee of the
Board, the Audit Committee, which is composed of all of the Directors who are
not interested persons of the Fund, as defined in the 1940 Act. The function of
the Audit Committee is to assist the Board of Directors in its oversight of the
Fund's financial reporting process.

                                       14




<Page>
    Approval of Investment Management Agreement. The Board of Directors,
including a majority of the Directors who are not parties to the Fund's
Investment Management Agreement, or interested persons of any such party
('Disinterested Directors') has the responsibility under the 1940 Act to approve
the Fund's Investment Management Agreement for its initial term and annually
thereafter at a meeting called for the purpose of voting on such matter. The
Investment Management Agreement was approved for an initial two-year term by the
Fund's Directors, including a majority of the Disinterested Directors, at a
meeting held on             , 2003. In determining to approve the Investment
Management Agreement, the Directors reviewed the materials provided by the
Investment Manager and considered the following: (1) the level of the management
fees and estimated expense ratio of the Fund as compared to competitive Funds of
a comparable size; (2) the nature and quality of the services rendered by the
Investment Manager; (3) anticipated benefits derived by the Investment Manager
from the relationship with the Fund; (4) the costs of providing services to the
Fund; and (5) the anticipated profitability of the Fund to the Investment
Manager. They also considered the fact that the Investment Manager agreed to pay
all organizational expenses and offering costs, other than the sales load, that
exceeded $.03 per share in connection with the Fund's common stock offering. The
Directors then took into consideration the benefits to be derived by the
Investment Manager in connection with the Investment Management Agreement,
noting particularly the research and related services, within the meaning of
Section 28(e) of the Securities Exchange Act of 1934, that the Investment
Manager would be eligible to receive by allocating the Fund's brokerage
transactions.

                 COMPENSATION OF DIRECTORS AND CERTAIN OFFICERS

    The following table sets forth estimated information regarding compensation
expected to be paid to Directors by the Fund for the current fiscal year ending
December 31, 2003 and the aggregate compensation paid by the fund complex of
which the Fund is a part for the fiscal year ended December 31, 2002. Officers
of the Fund and Directors who are interested persons of the Fund do not receive
any compensation from the Fund or any other fund in the fund complex which is a
U.S. registered investment company. Each of the other Directors is paid an
annual retainer of $5,500, and a fee of $500 for each meeting attended and is
reimbursed for the expenses of attendance at such meetings. In the column headed
`Total Compensation From Fund Complex Paid to Directors,' the compensation paid
to each Director represents the aggregate amount paid to the Director by the
Fund and the seven other funds that each Director serves in the fund complex.
The Directors do not receive any pension or retirement benefits from the fund
complex.

<Table>
<Caption>
                                                                                  TOTAL
                                                               AGGREGATE      COMPENSATION
                                                              COMPENSATION   COMPLEX PAID TO
         NAME OF PERSON, POSITION OF FUND DIRECTORS            FROM FUND        DIRECTORS
         ------------------------------------------            ---------        ---------
<S>                                                           <C>            <C>
Martin Cohen**, Director and President......................          0                0
Robert H. Steers**, Director and Chairman...................          0                0
</Table>

- ---------

 ** 'Interested person,' as defined in the 1940 Act, of the Fund because of the
    affiliation with Cohen & Steers Capital Management, Inc., the Fund's
    Investment Manager.

                                       15









<Page>
PRINCIPAL STOCKHOLDERS

    To the knowledge of the Fund, as of March   , 2003, no current director of
the Fund owned 1% or more of the outstanding Common Shares, and the officers and
directors of the Fund owned, as a group, less than 1% of the Common Shares.

    As of March   , 2003, no person to the knowledge of the Fund, owned
beneficially more than 5% of the outstanding Common Shares.

                     INVESTMENT ADVISORY AND OTHER SERVICES

THE INVESTMENT MANAGER

    Cohen & Steers Capital Management, Inc., with offices located at 757 Third
Avenue, New York, New York 10017, is the Investment Manager to the Fund. The
Investment Manager, a registered investment adviser, was formed in 1986 and
specializes in the management of real estate securities portfolios. Its current
clients include pension plans of leading corporations, endowment funds and
mutual funds, including Cohen & Steers Advantage Income Realty Fund, Inc., Cohen
& Steers Quality Income Realty Fund, Inc., Cohen & Steers Premium Income Realty
Fund, Inc. and Cohen & Steers Total Return Realty Fund, Inc., which are
closed-end investment companies, and Cohen & Steers Equity Income Fund, Inc.,
Cohen & Steers Institutional Realty Shares, Inc., Cohen & Steers Realty Shares,
Inc. and Cohen & Steers Special Equity Fund, Inc., which are open-end investment
companies. Mr. Cohen and Mr. Steers are 'controlling persons' of the Investment
Manager on the basis of their ownership of the Investment Manager's stock.

    Pursuant to the Investment Management Agreement, the Investment Manager
furnishes a continuous investment program for the Fund's portfolio, makes the
day-to-day investment decisions for the Fund, executes the purchase and sale
orders for the portfolio transactions of the Fund and generally manages the
Fund's investments in accordance with the stated policies of the Fund, subject
to the general supervision of the Board of Directors of the Fund.

    Under the Investment Management Agreement, the Fund pays the Investment
Manager a monthly management fee computed at the annual rate of 0.  % of the
average daily value of the managed assets (which equals the net asset value of
the Common Shares, including the liquidation preference on any Preferred Shares,
plus the principal amount on any borrowings) of the Fund.

    The Investment Manager also provides the Fund with such personnel as the
Fund may from time to time request for the performance of clerical, accounting
and other office services, such as coordinating matters with the
sub-administrator, the transfer agent and the custodian. The personnel rendering
these services, who may act as officers of the Fund, may be employees of the
Investment Manager or its affiliates. These services are provided at no
additional cost to the Fund. The Fund does not pay any additional amounts for
services performed by officers of the Investment Manager or its affiliates.

ADMINISTRATIVE SERVICES

    Pursuant to an Administration Agreement, the Investment Manager also
performs certain administrative and accounting functions for the Fund, including
(i) providing office space, telephone, office equipment and supplies for the
Fund; (ii) paying compensation of the Fund's officers for services rendered as
such; (iii) authorizing expenditures and approving bills for payment on behalf
of the Fund; (iv) supervising preparation of the periodic updating of the Fund's
registration statement, including prospectus and statement of additional
information, for the purpose of filings with the Securities and Exchange
Commission and state securities administrators and monitoring and maintaining
the effectiveness of such filings, as appropriate; (v) supervising preparation
of periodic reports to the Fund's shareholders and filing of these reports with
the Securities and Exchange Commission, Forms N-SAR filed with the Securities
and Exchange Commission, notices of dividends, capital gains distributions and
tax credits, and attending to routine correspondence and other communications
with individual shareholders; (vi) supervising the daily pricing of the Fund's
investment portfolio and the publication of the net asset value of the

                                       16







<Page>
Fund's shares, earnings reports and other financial data; (vii) monitoring
relationships with organizations providing services to the Company, including
the Custodian, Transfer Agent and printers; (viii) providing trading desk
facilities for the Fund; (ix) supervising compliance by the Fund with
record-keeping requirements under the Act and regulations thereunder,
maintaining books and records for the Fund (other than those maintained by the
Custodian and Transfer Agent) and preparing and filing of tax reports other than
the Fund's income tax returns; and (x) providing executive, clerical and
secretarial help needed to carry out these responsibilities. Under the
Administration Agreement, the Fund pays the Investment Manager an amount equal
to, on an annual basis, 0.02% of the Fund's managed assets.

    In accordance with the terms of the Administration Agreement and with the
approval of the Fund's Board of Directors, the Investment Manager has caused the
Fund to retain State Street Bank and Trust Company ('State Street Bank') as
sub-administrator under a fund accounting and administration agreement (the
'Sub-Administration Agreement'). Under the Sub-Administration Agreement, State
Street Bank has assumed responsibility for performing certain of the foregoing
administrative functions, including (i) determining the Fund's net asset value
and preparing these figures for publication; (ii) maintaining certain of the
Fund's books and records that are not maintained by the Investment Manager,
custodian or transfer agent; (iii) preparing financial information for the
Fund's income tax returns, proxy statements, shareholders reports, and SEC
filings; and (iv) responding to shareholder inquiries.

    Under the terms of the Sub-Administration Agreement, the Fund pays State
Street Bank a monthly sub-administration fee. The sub-administration fee paid by
the Fund to State Street Bank is computed on the basis of the net assets in the
Fund at an annual rate equal to 0.030% of the first $200 million in assets,
0.020% of the next $200 million, and 0.010% of assets in excess of $400 million,
with a minimum fee of $120,000. The aggregate fee paid by the Fund and the other
funds advised by the Investment Manager to State Street Bank is computed by
multiplying the total number of funds by each break point in the above schedule
in order to determine the aggregate break points to be used in calculating the
total fee paid by the Cohen & Steers family of funds (i.e., 6 funds at $200
million or $1.2 billion at 0.030%, etc.). The Fund is then responsible for its
pro rata amount of the aggregate administration fee.

    The Investment Manager remains responsible for monitoring and overseeing the
performance by State Street Bank, and EquiServe Trust Company, NA, as custodian
and transfer and disbursing agent, of their obligations to the Fund under their
respective agreements with the Fund, subject to the overall authority of the
Fund's Board of Directors.

CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT

    State Street Bank, which has its principal business office at 225 Franklin
Street, Boston, MA 02110, has been retained to act as custodian of the Fund's
investments and EquiServe Trust Company, NA, which has its principal business
office at 150 Royall Street, Canton, MA 02021, as the Fund's transfer and
dividend disbursing agent. Neither State Street nor EquiServe has any part in
deciding the Fund's investment policies or which securities are to be purchased
or sold for the Fund's portfolio.

CODE OF ETHICS

    The Fund, Investment Manager and the Fund's principal underwriters have
adopted codes of ethics in compliance with Rule 17j-1 under the 1940 Act. The
codes of ethics of the Fund and the Investment Manager, among other things,
prohibit management personnel from investing in REITs and real estate
securities, prohibit purchases in an initial public offering and require
pre-approval for investments in private placements. The Fund's Independent
Directors are prohibited from purchasing or selling any security if they knew or
reasonably should have known at the time of the transaction that, within the
most recent 15 days, the security is being or has been considered for purchase
or sale by the Fund, or is being purchased or sold by the Fund. The codes of
ethics

                                       17







<Page>
of the principal underwriters permit personnel of these firms that are subject
to the codes to invest in securities, including securities that may be purchased
or held by the Fund.

PRIVACY POLICY

    The Fund is committed to maintaining the privacy of its shareholders and to
safeguarding their nonpublic personal information. The following information is
provided to help you understand what personal information the Fund collects, how
we protect that information, and why in certain cases we may share this
information with others.

    The Fund does not receive any nonpublic personal information relating to the
shareholders who purchase shares through an intermediary that acts as the record
owner of the shares. In the case of shareholders who are record owners of the
Fund, we receive nonpublic personal information on account applications or other
forms. With respect to these shareholders, the Fund also has access to specific
information regarding their transactions in the Fund.

    The Fund does not disclose any nonpublic personal information about its
shareholders or former shareholders to anyone, except as permitted by law or as
is necessary to service shareholder accounts. The Fund restricts access to
nonpublic personal information about its shareholders to Cohen & Steers
employees with a legitimate business need for the information.

                      PORTFOLIO TRANSACTIONS AND BROKERAGE

    Subject to the supervision of the Directors, decisions to buy and sell
securities for the Fund and negotiation of its brokerage commission rates are
made by the Investment Manager. Transactions on U.S. stock exchanges involve the
payment by the Fund of negotiated brokerage commissions. There is generally no
stated commission in the case of securities traded in the over-the-counter
market but the price paid by the Fund usually includes an undisclosed dealer
commission or mark-up. In certain instances, the Fund may make purchases of
underwritten issues at prices which include underwriting fees.

    In selecting a broker to execute each particular transaction, the Investment
Manager will take the following into consideration: the best net price
available; the reliability, integrity and financial condition of the broker; the
size and difficulty in executing the order; and the value of the expected
contribution of the broker to the investment performance of the Fund on a
continuing basis. Accordingly, the cost of the brokerage commissions to the Fund
in any transaction may be greater than that available from other brokers if the
difference is reasonably justified by other aspects of the portfolio execution
services offered. Subject to such policies and procedures as the Directors may
determine, the Investment Manager shall not be deemed to have acted unlawfully
or to have breached any duty solely by reason of its having caused the Fund to
pay a broker that provides research services to the Investment Manager an amount
of commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker would have charged for effecting that
transaction, if the Investment Manager determines in good faith that such amount
of commission was reasonable in relation to the value of the research service
provided by such broker viewed in terms of either that particular transaction or
the Investment Manager's ongoing responsibilities with respect to the Fund.
Research and investment information is provided by these and other brokers at no
cost to the Investment Manager and is available for the benefit of other
accounts advised by the Investment Manager and its affiliates, and not all of
the information will be used in connection with the Fund. While this information
may be useful in varying degrees and may tend to reduce the Investment Manager's
expenses, it is not possible to estimate its value and in the opinion of the
Investment Manager it does not reduce the Investment Manager's expenses in a
determinable amount. The extent to which the Investment Manager makes use of
statistical, research and other services furnished by brokers is considered by
the Investment Manager in the allocation of brokerage business but there is no
formula by which such business is allocated. The Investment Manager does so in
accordance with its judgment of the best interests of the Fund and its
shareholders. The Investment Manager may also take into account payments made by
brokers effecting transactions for the Fund to other persons on behalf of the

                                       18







<Page>
Fund for services provided to it for which it would be obligated to pay (such as
custodial and professional fees). In addition, consistent with the Conduct Rules
of the National Association of Securities Dealers, Inc., and subject to seeking
best price and execution, the Investment Manager may consider sales of shares of
the Fund as a factor in the selection of brokers and dealers to enter into
portfolio transactions with the Fund.

                        DETERMINATION OF NET ASSET VALUE

    The Fund will determine the net asset value of its shares daily, as of the
close of trading on the New York Stock Exchange (currently 4:00 p.m. New York
time). Net asset value is computed by dividing the value of all assets of the
Fund (including accrued interest and dividends), less all liabilities (including
accrued expenses and dividends declared but unpaid), by the total number of
shares outstanding. Any swap transaction that the Fund enters into may,
depending on the applicable interest rate environment, have a positive or
negative value for purposes of calculating net asset value. Any cap transaction
that the Fund enters into may, depending on the applicable interest rate
environment, have no value or a positive value. In addition, accrued payments to
the Fund under such transactions will be assets of the Fund and accrued payments
by the Fund will be liabilities of the Fund.

    For purposes of determining the net asset value of the Fund, readily
marketable portfolio securities listed on the New York Stock Exchange are
valued, except as indicated below, at the last sale price reflected on the
consolidated tape at the close of the New York Stock Exchange on the business
day as of which such value is being determined. If there has been no sale on
such day, the securities are valued at the mean of the closing bid and asked
prices on such day. If no bid or asked prices are quoted on such day, then the
security is valued by such method as the Board of Directors shall determine in
good faith to reflect its fair market value. Readily marketable securities not
listed on the New York Stock Exchange but listed on other domestic or foreign
securities exchanges or admitted to trading on the National Association of
Securities Dealers Automated Quotations, Inc. ('NASDAQ') National List are
valued in a like manner. Portfolio securities traded on more than one securities
exchange are valued at the last sale price on the business day as of which such
value is being determined as reflected on the tape at the close of the exchange
representing the principal market for such securities.

    Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the Investment
Manager to be over-the-counter, but excluding securities admitted to trading on
the NASDAQ National List, are valued at the mean of the current bid and asked
prices as reported by NASDAQ or, in the case of securities not quoted by NASDAQ,
the National Quotation Bureau or such other comparable source as the Directors
deem appropriate to reflect their fair market value. However, certain
fixed-income securities may be valued on the basis of prices provided by a
pricing service when such prices are believed by the Board of Directors to
reflect the fair market value of such securities. The prices provided by a
pricing service take into account institutional size trading in similar groups
of securities and any developments related to specific securities. Where
securities are traded on more than one exchange and also over-the-counter, the
securities will generally be valued using the quotations the Board of Directors
believes reflect most closely the value of such securities.

                              REPURCHASE OF SHARES

    The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Instead the
Fund's shares will trade in the open market at a price that will be a function
of several factors, including dividend levels (which are in turn affected by
expenses), net asset value, call protection, price, dividend stability, relative
demand for and supply of such shares in the market, market and economic
conditions and other factors. Because shares of a closed-end investment company
may frequently trade at prices lower than net asset value, the Fund's Board of
Directors may consider action that might be taken to reduce or eliminate any
material discount from net asset value in respect of shares, which may include
the repurchase of such shares in the open market, private transactions, the
making of a tender offer

                                       19







<Page>
for such shares at net asset value, or the conversion of the Fund to an open-end
investment company. The Board of Directors may not decide to take any of these
actions. During the pendency of a tender offer, the Fund will publish how Common
Shareholders may readily ascertain the net asset value. In addition, there can
be no assurance that share repurchases or tender offers, if undertaken, will
reduce market discount.

    Subject to its investment limitations, the Fund may use the accumulation of
cash to finance repurchase of shares or to make a tender offer. Interest on any
borrowings to finance share repurchase transactions or the accumulation of cash
by the Fund in anticipation of share repurchases or tenders will reduce the
Fund's income. Any share repurchase, tender offer or borrowing that might be
approved by the Board of Directors would have to comply with the Securities
Exchange Act of 1934 and the 1940 Act and the rules and regulations under each
of those Acts.

    Although the decision to take action in response to a discount from net
asset value will be made by the Board of Directors at the time it considers the
issue, it is the Board's present policy, which may be changed by the Board, not
to authorize repurchases of Common Shares or a tender offer for such shares if
(1) such transactions, if consummated, would (a) result in delisting of the
common shares from the New York Stock Exchange, or (b) impair the Fund's status
as a regulated investment company under the Code (which would make the Fund a
taxable entity, causing its income to be taxed at the corporate level in
addition to the taxation of shareholders who receive dividends from the Fund) or
as a registered closed-end investment company under the 1940 Act; (2) the Fund
would not be able to liquidate portfolio securities in an orderly manner and
consistent with the Fund's investment objectives and policies in order to
repurchase shares; or (3) there is, in the Board's judgment, any (a) material
legal action or proceeding instituted or threatened challenging such
transactions or otherwise materially adversely affecting the Fund, (b) general
suspension of or limitation on prices for trading securities on the New York
Stock Exchange, (c) declaration of a banking moratorium by Federal or state
authorities or a suspension of payment by U.S. banks in which the Fund invests,
(d) material limitation affecting the Fund or the issuers of its portfolio
securities by Federal or state authorities on the extension of credit by
institutions or on the exchange of foreign currency, (e) commencement of armed
hostilities or other international or national calamity directly or indirectly
involving the United States, or (f) other event or condition which would have a
material adverse effect (including any adverse tax effect) on the Fund or its
shareholders if shares were repurchased. The Board may in the future modify
these conditions in light of experience.

    The repurchase by the Fund of its shares at prices below net asset value
will result in an increase in the net asset value of those shares that remain
outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Fund's shares trading at
a price equal to their net asset value. Nevertheless, the fact that the shares
may be the subject of repurchase or tender offers at net asset value from time
to time, or that the Fund may be converted to an open-end investment company,
may reduce any spread between market price and net asset value that might
otherwise exist.

    In addition, a purchase by the Fund of its Common Shares will decrease the
Fund's total assets which would likely have the effect of increasing the Fund's
expense ratio. Any purchase by the Fund of its Common Shares at a time when
preferred shares are outstanding will increase the leverage applicable to the
outstanding common shares then remaining.

    Before deciding whether to take any action, the Fund's Board of Directors
would likely consider all relevant factors, including the extent and duration of
the discount, the liquidity of the Fund's portfolio, the impact of any action on
the Fund or its shareholders and market considerations. Based on the
considerations, even if the Fund's shares should trade at a discount, the Board
may determine that, in the interest of the Fund and its shareholders, no action
should be taken.

                                       20







<Page>
                                    TAXATION

    Set forth below is a discussion of certain U.S. federal income tax issues
concerning the Fund and the purchase, ownership and disposition of Fund shares.
This discussion does not purport to be complete or to deal with all aspects of
federal income taxation that may be relevant to shareholders in light of their
particular circumstances. This discussion is based upon present provisions of
the Code, the regulations promulgated thereunder, and judicial and
administrative ruling authorities, all of which are subject to change, which
change may be retroactive. Prospective investors should consult their own tax
advisers with regard to the federal tax consequences of the purchase, ownership,
or disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, foreign country, or other taxing jurisdiction.

TAXATION OF THE FUND

    The Fund intends to elect to be treated as, and to qualify annually as, a
regulated investment company under the Code.

    To qualify for the favorable U.S. federal income tax treatment generally
accorded to regulated investment companies, the Fund must, among other things,
(a) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock, securities or foreign currencies or other income
derived with respect to its business of investing in such stock, securities or
currencies; (b) diversify its holdings so that, at end of each quarter of the
taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash and cash items (including receivables), U.S. Government
securities, securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited for the
purposes of this calculation to an amount not greater than 5% of the value of
the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities (other than U.S. Government securities or
the securities of other regulated investment companies) of a single issuer, or
two or more issuers which the Fund controls and are engaged in the same, similar
or related trades or businesses; and (c) distribute at least 90% of the sum of
its investment company taxable income (as that term is defined in the Code, but
without regard to the deduction for dividends paid) and net tax-exempt interest
each taxable year.

    As a regulated investment company, the Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income and net capital
gain (the excess of net long-term capital gain over net short-term capital
loss), if any, that it distributes to shareholders. The Fund intends to
distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and net capital gain. Amounts not distributed
on a timely basis in accordance with a calendar year distribution requirement
are subject to a nondeductible 4% excise tax. To prevent imposition of the
excise tax, the Fund must distribute during each calendar year an amount equal
to the sum of (1) at least 98% of its ordinary income (not taking into account
any capital gains or losses) for the calendar year, (2) at least 98% of its
capital gains in excess of its capital losses (adjusted for certain ordinary
losses) for the one-year period ending on October 31 of the calendar year, and
(3) any ordinary income and capital gains for previous years that were not
distributed during those years and on which the Fund paid no federal income tax.
A distribution will be treated as paid on December 31 of the current calendar
year if it is declared by the Fund in October, November or December with a
record date in such a month and paid by the Fund during January of the following
calendar year. Such distributions will be taxable to shareholders in the
calendar year in which the distributions are declared, rather than the calendar
year in which the distributions are received. To prevent application of the
excise tax, the Fund intends to make its distributions in accordance with the
calendar year distribution requirement.

    If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its shareholders) and all

                                       21







<Page>
distributions out of earnings and profits (including distributions of net
capital gain) would be taxed to shareholders as ordinary income.

DISTRIBUTIONS

    Dividends paid out of the Fund's current and accumulated earnings and
profits will, except in the case of capital gain dividends described below, be
taxable to a U.S. shareholder as ordinary income to the extent of the Fund's
earnings and profits, whether paid in cash or reinvested in additional shares.
Although such dividends will generally not qualify for the DRD available to
corporations under Section 243 of the Code, if a portion of the Fund's income
consists of qualifying dividends paid by U.S. corporations (other than REITs),
a portion of the dividends paid by the Fund to corporate shareholders may be
eligible for the DRD. Distributions of net capital gain, if any, designated
as capital gain dividends are taxable to a shareholder as long-term capital
gains, regardless of how long the shareholder has held Fund shares. A
distribution of an amount in excess of the Fund's current and accumulated
earnings and profits will be treated by a shareholder as a return of
capital which is applied against and reduces the shareholder's basis in his or
her shares. To the extent that the amount of any such distribution exceeds the
shareholder's basis in his or her shares, the excess will be treated by the
shareholder as gain from a sale or exchange of the shares.

    The Internal Revenue Service ('IRS') currently requires that a regulated
investment company that has two or more classes of stock allocate to each such
class proportionate amounts of each type of its income (such as ordinary income,
capital gains and dividends qualifying for the DRD) based upon the percentage of
total dividends paid out of earnings or profits to each class for the tax year.
Accordingly, the Fund intends each year to allocate capital gain dividends and
dividends qualifying for the DRD between its Common Shares and Fund Preferred
Shares in proportion to the total dividends paid out of earnings or profits to
each class with respect to such tax year.

    Distributions will be treated in the manner described above regardless of
whether such distributions are paid in cash or invested in additional shares of
the Fund.

    The Fund may elect to retain its net capital gain or a portion thereof for
investment and be taxed at corporate rates on the amount retained. In such case,
it may designate the retained amount as undistributed capital gains in a notice
to its shareholders who will be treated as if each received a distribution of
his pro rata share of such gain, with the result that each shareholder will
(i) be required to report his pro rata share of such gain on his tax return as
long-term capital gain, (ii) receive a refundable tax credit for his pro rata
share of tax paid by the Fund on the gain and (iii) increase the tax basis for
his shares by an amount equal to the deemed distribution less the tax credit.

    Shareholders will be notified annually as to the U.S. federal tax status of
distributions.

SALE OR EXCHANGE OF FUND SHARES

    Upon the sale or other disposition of shares of the Fund which a shareholder
holds as a capital asset, such shareholder may realize a capital gain or loss
which will be long-term or short-term, depending upon the shareholder's holding
period for the shares. Generally, a shareholder's gain or loss will be a
long-term gain or loss if the shares have been held for more than one year.

    Any loss realized on a sale or exchange will be disallowed to the extent the
shares disposed of are replaced (including through reinvestment of dividends)
within a period of 61 days beginning 30 days before and ending 30 days after
disposition of the shares. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss. Any loss realized by a shareholder
on a disposition of Fund shares held by the shareholder for six months or less
will be treated as a long-term capital loss to the extent of any distributions
of net capital gain received by the shareholder (or amounts designated as
undistributed capital gains) with respect to such shares.

                                       22







<Page>
NATURE OF FUND'S INVESTMENTS

    Certain of the Fund's investment practices are subject to special and
complex federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gain into higher taxed
short-term capital gain or ordinary income, (iii) convert an ordinary loss or a
deduction into a capital loss (the deductibility of which is more limited), (iv)
cause the Fund to recognize income or gain without a corresponding receipt of
cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur and (vi) adversely alter the characterization of
certain complex financial transactions. The Fund will monitor its transactions
and may make certain tax elections in order to mitigate the effect of these
provisions.

ORIGINAL ISSUE DISCOUNT SECURITIES

    Investments by the Fund in zero coupon or other discount securities will
result in income to the Fund equal to a portion of the excess of the face value
of the securities over their issue price (the 'original issue discount') each
year that the securities are held, even though the Fund receives no cash
interest payments. This income is included in determining the amount of income
which the Fund must distribute to maintain its status as a regulated investment
company and to avoid the payment of federal income tax and the 4% excise tax.
Because such income may not be matched by a corresponding cash distribution to
the Fund, the Fund may be required to borrow money or dispose of other
securities to be able to make distributions to its shareholders.

INVESTMENTS IN SECURITIES OF UNCERTAIN TAX CHARACTER

    The Fund may invest in preferred securities or other securities the U.S.
federal income tax treatment of which may not be clear or may be subject to
recharacterization by the IRS. To the extent the tax treatment of such
securities or the income from such securities differs from the tax treatment
expected by the Fund, it could affect the timing or character of income
recognized by the Fund, requiring the Fund to purchase or sell securities, or
otherwise change its portfolio, in order to comply with the tax rules applicable
to regulated investment companies under the Code.

INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS

    The Fund may invest in REITs that hold residual interests in real estate
mortgage investment conduits ('REMICs'). Under Treasury regulations that have
not yet been issued, but may apply retroactively, a portion of the Fund's income
from a REIT that is attributable to the REIT's residual interest in a REMIC
(referred to in the Code as an 'excess inclusion') will be subject to federal
income tax in all events. These regulations are also expected to provide that
excess inclusion income of a regulated investment company, such as the Fund,
will be allocated to shareholders of the regulated investment company in
proportion to the dividends received by such shareholders, with the same
consequences as if the shareholders held the related REMIC residual interest
directly. In general, excess inclusion income allocated to shareholders (i)
cannot be offset by net operating losses (subject to a limited exception for
certain thrift institutions), (ii) will constitute unrelated business taxable
income to entities (including a qualified pension plan, an individual retirement
account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax
on unrelated business income, thereby potentially requiring such an entity that
is allocated excess inclusion income, and otherwise might not be required to
file a tax return, to file a tax return and pay tax on such income, and (iii) in
the case of a foreign shareholder, will not qualify for any reduction in U.S.
federal withholding tax. In addition, if at any time during any taxable year a
'disqualified organization' (as defined in the Code) is a record holder of a
share in a regulated investment company, then the regulated investment company
will be subject to a tax equal to that portion of its excess inclusion income
for the taxable year that is allocable to the disqualified organization,
multiplied by the highest federal income tax rate imposed on corporations. The
Investment Manager does not intend on behalf of the Fund to invest in REITs, a
substantial portion of the assets of which consists of residual interests in
REMICs.

                                       23







<Page>
BACKUP WITHHOLDING

    The Fund may be required to withhold U.S. federal income tax on all taxable
distributions and redemption proceeds payable to shareholders who fail to
provide the Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the IRS that they are
subject to backup withholding. Corporate shareholders and certain other
shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. federal income tax liability.

FOREIGN SHAREHOLDERS

    U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership (a 'foreign shareholder') depends on whether the income
of the Fund is 'effectively connected' with a U.S. trade or business carried on
by the shareholder.

    Income Not Effectively Connected. If the income from the Fund is not
'effectively connected' with a U.S. trade or business carried on by the foreign
shareholder, distributions of investment company taxable income will be subject
to a U.S. tax of 30% (or lower treaty rate, except in the case of any excess
inclusion income allocated to the shareholder (see 'Taxation -- Investment in
Real Estate Investment Trusts' above)), which tax is generally withheld from
such distributions.

    Capital gain dividends and any amounts retained by the Fund which are
designated as undistributed capital gains will not be subject to U.S. tax at the
rate of 30% (or lower treaty rate) unless the foreign shareholder is a
nonresident alien individual and is physically present in the United States for
more than 182 days during the taxable year and meets certain other requirements.
However, this 30% tax on capital gains of nonresident alien individuals who are
physically present in the United States for more than the 182 day period only
applies in exceptional cases because any individual present in the United States
for more than 182 days during the taxable year is generally treated as a
resident for U.S. income tax purposes; in that case, he or she would be subject
to U.S. income tax on his or her worldwide income at the graduated rates
applicable to U.S. citizens, rather than the 30% U.S. tax. In the case of a
foreign shareholder who is a nonresident alien individual, the Fund may be
required to withhold U.S. income tax on distributions of net capital gain unless
the foreign shareholder certifies his or her non-U.S. status under penalties of
perjury or otherwise establishes an exemption. See 'Taxation-Backup Withholding'
above. Any gain that a foreign shareholder realizes upon the sale or exchange of
such shareholder's shares of the Fund will ordinarily be exempt from U.S. tax
unless (i) in the case of a shareholder that is a nonresident alien individual,
the gain is U.S. source income and such shareholder is physically present in the
United States for more than 182 days during the taxable year and meets certain
other requirements, or (ii) at any time during the shorter of the period during
which the foreign shareholder held shares of the Fund and the five year
period ending on the date of the disposition of those shares, the Fund
was a 'U.S. real property holding corporation' and the foreign
shareholder actually or constructively held more than 5% of the shares of the
Fund, in which event described in (ii), the gain would be taxed in the same
manner as for a U.S. shareholder as discussed above and a 10% U.S. federal
withholding tax generally would be imposed on the amount realized on the
disposition of such shares to be credited against the foreign shareholder's U.S.
federal income tax liability on such disposition. A corporation is a 'U.S. real
property holding corporation' if the fair market value of its U.S. real property
interests equals or exceeds 50% of the fair market value of such interests plus
its interests in real property located outside the United States plus any other
assets used or held for use in a business. In the case of the Fund, U.S. real
property interests include interests in stock in U.S. real property holding
corporations (other than stock of a REIT controlled by U.S. persons and holdings
of 5% or less in the stock of publicly traded U.S. real property holding
corporations) and certain participating debt securities.

    Income Effectively Connected. If the income from the Fund is 'effectively
connected' with a U.S. trade or business carried on by a foreign shareholder,
then distributions of investment company taxable income and capital gain
dividends, any amounts retained by the Fund which are

                                       24







<Page>
designated as undistributed capital gains and any gains realized upon the sale
or exchange of shares of the Fund will be subject to U.S. income tax at the
graduated rates applicable to U.S. citizens, residents and domestic
corporations. Foreign corporate shareholders may also be subject to the branch
profits tax imposed by the Code.

    The tax consequences to a foreign shareholder entitled to claim the benefits
of an applicable tax treaty may differ from those described herein. Foreign
shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Fund.

BUSH DIVIDEND PROPOSAL

    President Bush has recently proposed eliminating the taxation of dividends
paid by corporations to individuals out of previously taxed corporate income,
including such dividends received by a mutual fund and passed through to its
individual shareholders. If, or in what form, this proposal may be enacted into
law is uncertain. Under the current proposal, certain dividends paid on
preferred securities apparently would be permitted to be distributed tax-free to
individual shareholders (including individual shareholders of closed-end funds,
such as the Fund). At this time, however, some of the details of the proposal
have not been specified. In addition, it is uncertain if, and in what form, the
proposal will ultimately be adopted. Accordingly, it is not possible to evaluate
how this proposal might affect the tax discussion above.

TAX SHELTER REPORTING REGULATIONS

    Under recently promulgated Treasury regulations, if a shareholder recognizes
a loss with respect to shares of $2 million or more for an individual
shareholder or $10 million or more for a corporate shareholder, the shareholder
must file with the IRS a disclosure statement on Form 8886. Direct shareholders
of portfolio securities are in many cases excepted from this reporting
requirement, but under current guidance, shareholders of a regulated investment
company are not excepted. Future guidance may extend the current exception from
this reporting requirement to shareholders of most or all regulated investment
companies. The fact that a loss is reportable under these regulations does not
affect the legal determination of whether the taxpayer's treatment of the loss
is proper. Shareholders should consult their tax advisors to determine the
applicability of these regulations in light of their individual circumstances.

OTHER TAXATION

    Fund shareholders may be subject to state, local and foreign taxes on their
Fund distributions. Shareholders are advised to consult their own tax advisers
with respect to the particular tax consequences to them of an investment in the
Fund.
                            PERFORMANCE INFORMATION

    From time to time, the Fund may quote the Fund's total return, aggregate
total return or yield in advertisements or in reports and other communications
to shareholders. The Fund's performance will vary depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of the Fund's performance in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in the Fund with certain bank deposits or other investments that pay
a fixed yield for a stated period of time. Investors comparing the Fund's
performance with that of other investment companies should give consideration to
the quality and maturity of the respective investment companies' portfolio
securities.

AVERAGE ANNUAL TOTAL RETURN

    The Fund's 'average annual total return' figures described in the Prospectus
are computed according to a formula prescribed by the SEC. The formula can be
expressed as follows:

                                      25







<Page>

                                               P(1 + T)'pp'n = ERV
  Where: P =  a hypothetical initial payment of $1,000
         T =  average annual total return
         n =  number of years
       ERV =  Ending Redeemable Value of a hypothetical $1,000 investment
              made at the beginning of a 1-, 5-, or 10-year period at the
              end of a 1-, 5-, or 10-year period (or fractional portion
              thereof), assuming reinvestment of all dividends and
              distributions.

YIELD

    Quotations of yield for the Fund will be based on all investment income per
share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ('net investment income') and
are computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:

                                   a-b
                           = --------------------
                             2[(cd + 1)'pp'6 - 1]

  Where: a =  dividends and interest earned during the period,

         b =  expenses accrued for the period (net of reimbursements),

         c =  the average daily number of shares outstanding during the
              period that were entitled to receive dividends, and

         d =  the maximum offering price per share on the last day of the
              period.

    In reports or other communications to shareholders of the Fund or in
advertising materials, the Fund may compare its performance with that of (i)
other investment companies listed in the rankings prepared by Lipper Analytical
Services, Inc., publications such as Barrons, Business Week, Forbes, Fortune,
Institutional Investor, Kiplinger's Personal Finance, Money, Morningstar Mutual
Fund Values, The New York Times, The Wall Street Journal and USA Today or other
industry or financial publications or (ii) the Standard and Poor's Index of 500
Stocks, the Dow Jones Industrial Average, Dow Jones Utility Index, the National
Association of Real Estate Investment Trusts (NAREIT) Equity REIT Index, the
Salomon Brothers Broad Investment Grade Bond Index (BIG), Morgan Stanley Capital
International Europe Australia Far East (MSCI EAFE) Index, the NASDAQ Composite
Index, and other relevant indices and industry publications. The Fund may also
compare the historical volatility of its portfolio to the volatility of such
indices during the same time periods. (Volatility is a generally accepted
barometer of the market risk associated with a portfolio of securities and is
generally measured in comparison to the stock market as a whole -- the
beta -- or in absolute terms -- the standard deviation.)

                      COUNSEL AND INDEPENDENT ACCOUNTANTS

    Simpson Thacher & Bartlett serves as counsel to the Fund, and is located at
425 Lexington Avenue, New York, New York 10017-3909.                      have
been appointed as independent accountants for the Fund. The statement of assets
and liabilities of the Fund as of           , 2003 and the statement of
operations of the Fund for the one day then ended included in this statement of
additional information has been so included in reliance on the report of
                     , New York, New York, independent accountants, given on the
authority of the firm as experts in auditing and accounting.

                             ADDITIONAL INFORMATION

    A Registration Statement on Form N-2, including amendments thereto, relating
to the shares offered hereby has been filed by the Fund with the Securities and
Exchange Commission, Washington, D.C. The Prospectus and this Statement of
Additional Information do not contain all the information set forth in the
Registration Statement, including any exhibits and schedules thereto. For
further information with respect to the Fund and the shares offered hereby,
reference is made to the Registration Statement. Statements contained in the
Prospectus and this Statement of Additional Information as to the contents of
any contract or other document referred to are

                                       26







<Page>
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without charge
at the Commission's principal office in Washington, D.C., and copies of any part
thereof may be obtained from the Commission upon the payment of fees prescribed
by the Commission.

<Table>
<Caption>
     COHEN & STEERS REIT AND PREFERRED BALANCED INCOME FUND, INC.
           STATEMENT OF ASSETS AND LIABILITIES AS OF , 2003


<S>                                                           <C>
Assets:
    Cash....................................................  $
    Deferred Offering Costs.................................
    Receivable from adviser.................................
                                                              --------
        Total Assets........................................
                                                              --------
Liabilities
    Accrued expenses........................................
    Payable for organization costs..........................
                                                              --------
        Total Liabilities...................................
                                                              --------
Net Assets applicable to 7,000 shares of $.001 par value
  common stock outstanding..................................  $
                                                              --------
                                                              --------
Net asset value per Common Shares outstanding ($100,275
  divided by 7,000 Common shares outstanding)...............  $
                                                              --------
                                                              --------
</Table>

<Table>
                       STATEMENT OF OPERATIONS
              FOR THE ONE DAY ENDED               , 2003
<S>                                                           <C>
INVESTMENT INCOME...........................................  $  --
Expenses:
    Organization costs......................................    15,000
    Expense reimbursement...................................   (15,000)
                                                              --------
        Total expenses......................................     --
                                                              --------
Net investment income.......................................  $  --
                                                              --------
                                                              --------
</Table>

NOTES TO FINANCIAL STATEMENTS

NOTE 1: ORGANIZATION

    Cohen & Steers REIT and Preferred Balanced Income Fund, Inc. (the 'Fund')
was incorporated under the laws of the State of Maryland on      , 2003 and is
registered under the Investment Company Act of 1940 (the 'Act'), as amended, as
a closed-end non-diversified management investment company. The Fund has been
inactive since that date except for matters relating to the Fund's
establishment, designation, registration of the Fund's shares of common stock
('Shares') under the Securities Act of 1933, and the sale of 4,200 shares
('Initial Shares') for $100,275 to Cohen & Steers Capital Management, Inc. (the
'Adviser'). The proceeds of such Initial Shares in the Fund were invested in
cash. There are 100,000,000 shares of $0.001 par value common stock authorized.

    Cohen & Steers Capital Management, Inc. has agreed to reimburse all
organization expenses (approximately $15,000) and pay all offering costs (other
than the sales load) that exceed $0.03 per Common Share.

NOTE 2: ACCOUNTING POLICIES

    The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of income and expenses
during the reporting period. Actual results could differ from these estimates.

                                       27







<Page>
NOTE 3: INVESTMENT MANAGEMENT AGREEMENT

    The Fund has entered into an Investment Management Agreement with the
Adviser, under which the Adviser will provide general investment advisory and
adminstrative services for the Fund. For providing these services, facilities
and for bearing the related expenses, the Adviser will receive a fee from the
Fund, accrued daily and paid monthly, at an annual rate equal to 0.  % of the
average daily managed assets. Managed asset value is the net asset value of the
Common Shares plus the liquidation preference of any Fund Preferred Shares and
the principal amount of any borrowings used for leverage.

                                       28







<Page>
                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholder and Board of Directors of
COHEN & STEERS REIT AND PREFERRED BALANCED INCOME FUND, INC.:

In our opinion, the accompanying statement of assets and liabilities and the
related statement of operations present fairly, in all material respects, the
financial position of Cohen & Steers REIT and Preferred Balanced Income Fund,
Inc. (the 'Fund') at           , 2003 and the results of its operations for the
one day then ended in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.

New York, New York
          , 2003

                                       29







<Page>
                                                                      APPENDIX A

                             RATINGS OF INVESTMENTS

    Description of certain ratings assigned by S&P and Moody's:

S&P

LONG-TERM

    'AAA' -- An obligation rated 'AAA' has the highest rating assigned by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong.

    'AA' -- An obligation rated 'AA' differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.

    'A' -- An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.

    'BBB' -- An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.

    'BB,' 'B,' 'CCC,' 'CC,' and 'C' -- Obligations rated 'BB,' 'B,' 'CCC,' 'CC,'
and 'C' are regarded as having significant speculative characteristics. 'BB'
indicates the least degree of speculation and 'C' the highest. While such
obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.

    'BB' -- An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.

    'B' -- An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB,' but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.

    'CCC' -- An obligation rated 'CCC' is currently vulnerable to nonpayment,
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.

    'CC' -- An obligation rated 'CC' is currently highly vulnerable to
nonpayment.

    'C' -- A subordinated debt or preferred stock obligation rated 'C' is
currently highly vulnerable to nonpayment. The 'C' rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action taken,
but payments on this obligation are being continued. A 'C' also will be assigned
to a preferred stock issue in arrears on dividends or sinking fund payments, but
that is currently paying.

    'D' -- An obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.

    'r' -- The symbol 'r' is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or

                                      A-1




<Page>
commodities; obligations exposed to severe prepayment risk -- such as
interest-only or principal-only mortgage securities; and obligations with
unusually risky interest terms, such as inverse floaters.

    'N.R.' -- The designation 'N.R.' indicates that no rating has been
requested, that there is insufficient information on which to base a rating, or
that S&P does not rate a particular obligation as a matter of policy.

    Note: The ratings from 'AA' to 'CCC' may be modified by the addition of a
plus (+) or minus ( - ) sign designation to show relative standing within the
major rating categories.

SHORT-TERM

    'A-1' -- A short-term obligation rated 'A-1' is rated in the highest
category by S&P. The obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are given a plus
sign (+) designation. This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.

    'A-2' -- A short-term obligation rated 'A-2' is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.

    'A-3' -- A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.

    'B' -- A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet is
financial commitment on the obligation.

    'C' -- A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.

    'D' -- A short-term obligation rated 'D' is in payment default. The 'D'
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The 'D' rating also
will be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.

MOODY'S

LONG-TERM

    'Aaa' -- Bonds rated 'Aaa' are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as 'gilt
edged.' Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.

    'Aa' -- Bonds rated 'Aa' are judged to be of high quality by all standards.
Together with the 'Aaa' group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in 'Aaa' securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the 'Aaa'
securities.

    'A' -- Bonds rated 'A' possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.

                                      A-2




<Page>
    'Baa' -- Bonds rated 'Baa' are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

    'Ba' -- Bonds rated 'Ba' are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

    'B' -- Bonds rated 'B' generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

    'Caa' -- Bonds rated 'Caa' are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

    'Ca' -- Bonds rated 'Ca' represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

    'C' -- Bonds rated 'C' are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

    Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from 'Aa' through 'Caa'. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.

PRIME RATING SYSTEM (SHORT-TERM)

    Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:

        Leading market positions in well-established industries.

        High rates of return on funds employed.

        Conservative capitalization structure with moderate reliance on debt and
    ample asset protection.

        Broad margins in earnings coverage of fixed financial charges and high
    internal cash generation.

        Well-established access to a range of financial markets and assured
    sources of alternate liquidity.

    Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.

    Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.

    Issuers rated Not Prime do not fall within any of the Prime rating
categories.

                                      A-3






<Page>
                                     PART C

                               OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

1) Financial Statements

    Part A -- None

    Part B -- Report of Independent Accountants**

    Statement of Assets and Liabilities**

2) Exhibits

<Table>
<C>  <S>
(a)  -- Articles of Incorporation.*
(b)  -- By-Laws.*
(c)  -- Not Applicable
(d)  -- (i) Form of specimen share certificate**
     -- (ii) The rights of security holders are defined in the
        Registrant's Articles of Incorporation (Article FIFTH and
        Article EIGHTH) and the Registrant's By-Laws (Article II
        and Article VI).
(e)  -- Form of Dividend Reinvestment Plan**
(f)  -- Not Applicable
(g)  -- (i) Form of Investment Management Agreement**
(g)  -- (ii) Agreement to Waive Investment Management Fees**
(h)  -- Form of Underwriting Agreement**
(i)  -- Not Applicable
(j)  -- Form of Custodian Agreement**
(k)  -- (i) Form of Transfer Agency, Registrar and Dividend
        Disbursing Agency Agreement**
     -- (ii) Form of Administration Agreement between the Fund
        and the Investment Manager**
     -- (iii) Form of Administration Agreement between the Fund
        and State Street Bank and Trust Company**
(l)  -- (i) Opinion and Consent of Simpson Thacher & Bartlett**
     -- (ii) Opinion and Consent of Venable, Baetjer and Howard,
        LLP**
(m)  -- Not Applicable
(n)  -- Consent of Independent Accountants**
(o)  -- Not Applicable
(p)  -- Form of Investment Representation Letter**
(q)  -- Not Applicable
(r)  -- (i) Code of Ethics of the Fund**
     -- (ii) Code of Ethics of Investment Manager**
(s)  -- Power of Attorney**
</Table>

- ---------
 * Filed herewith.

** To be filed by Amendment.

ITEM 25. MARKETING ARRANGEMENTS

    See Exhibit 2(h).

                                      C-1




<Page>
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

    The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:

<Table>
<S>                                                           <C>
SEC Registration fees.......................................  $
New York Stock Exchange listing fee*........................
Printing and engraving expenses*............................
Auditing fees and expenses*.................................
Legal fees and expenses*....................................
NASD Fees*..................................................
Miscellaneous*..............................................
                                                              -------
    Total*..................................................  $
                                                              -------
                                                              -------
</Table>

- ---------

* Estimated.

ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

    None.

ITEM 28. NUMBER OF HOLDERS OF SECURITIES

<Table>
<Caption>
                                                                NUMBER OF
                       TITLE OF CLASS                         RECORD HOLDERS
                       --------------                         --------------
<S>                                                           <C>
Common Stock, par value $.001 per share.....................       None
</Table>

ITEM 29. INDEMNIFICATION

    It is the Registrant's policy to indemnify its directors, officers,
employees and other agents to the maximum extent permitted by Section 2-418 of
the General Corporation Law of the State of Maryland as set forth in Article
NINTH of Registrant's Articles of Incorporation, and Article VIII of the
Registrant's By-Laws. The liability of the Registrant's directors and officers
is dealt with in Article NINTH of Registrant's Articles of Incorporation. The
liability of Cohen & Steers Capital Management, Inc., the Registrant's
investment manager (the 'Investment Manager'), for any loss suffered by the
Registrant or its shareholders is set forth in Section 5 of the Investment
Management Agreement.

    The Registrant has agreed to indemnify the Underwriters of the Registrant's
common stock to the extent set forth in Exhibit 2(h).

    Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to the directors and officers, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in such Act and is
therefore unenforceable. If a claim for indemnification against such liabilities
under the Securities Act of 1933 (other than for expenses incurred in a
successful defense) is asserted against the Company by the directors or officers
in connection with the shares, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in such Act and will be governed by the
final adjudication of such issue.

ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT MANAGER

    The descriptions of the Investment Manager under the caption 'Management of
the Fund' in the Prospectus and in the Statement of Additional Information,
respectively, constituting Parts A and B, respectively, of this Registration
Statement are incorporated by reference herein.

                                      C-2




<Page>
    The following is a list of the Directors and Officers of the Investment
Manager. None of the persons listed below has had other business connections of
a substantial nature during the past two fiscal years.

<Table>
<Caption>
                      NAME                                           TITLE
                      ----                                           -----
<S>                                               <C>
Robert H. Steers................................  Chairman, Director
Martin Cohen....................................  President, Director
Joseph M. Harvey................................  Senior Vice President and Director of Research
James S. Corl...................................  Senior Vice President and Director of Investment
                                                    Strategy
John J. McCombe.................................  Senior Vice President
Adam M. Derechin................................  Senior Vice President
Lawrence B. Stoller.............................  Senior Vice President and General Counsel
Greg E. Brooks..................................  Senior Vice President
William F. Scapell..............................  Senior Vice President
Rahul Bhattacharjee.............................  Vice President
Jay J. Chen.....................................  Vice President
Terrance R. Ober................................  Vice President
Victor M. Gomez.................................  Vice President -- Finance and Treasurer
Anthony Dotro...................................  Vice President
Robert Tisler...................................  Vice President
Mark Freed......................................  Vice President
Norbert Barrios.................................  Vice President
</Table>

    Cohen & Steers Capital Management, Inc. acts as Investment Manager of, in
addition to the Registrant, the following registered investment companies:

    Cohen & Steers Advantage Income Realty Fund, Inc.

    Cohen & Steers Institutional Realty Shares, Inc.

    Cohen & Steers Equity Income Fund, Inc.

    Cohen & Steers Premium Income Realty Fund, Inc.

    Cohen & Steers Quality Income Realty Fund, Inc.

    Cohen & Steers Realty Shares, Inc.

    Cohen & Steers Total Return Realty Fund, Inc.

    Cohen & Steers Special Equity Fund, Inc.

    American Skandia Trust -- AST Cohen & Steers Realty Portfolio

ITEM 31. LOCATION OF ACCOUNTS AND RECORDS

    The majority of the accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940, as amended
and the Rules thereunder will be maintained as follows: journals, ledgers,
securities records and other original records will be maintained principally at
the offices of the Registrant's Administrator and Custodian, State Street Bank
and Trust Company. All other records so required to be maintained will be
maintained at the offices of Cohen & Steers Capital Management, Inc., 757 Third
Avenue, New York, New York 10017.

ITEM 32. MANAGEMENT SERVICES

    Not applicable.

ITEM 33. UNDERTAKINGS

    (1) Registrant undertakes to suspend the offering of shares until the
prospectus is amended, if subsequent to the effective date of this registration
statement, its net asset value declines more

                                      C-3




<Page>
than ten percent from its net asset value as of the effective date of the
Registration Statement or its net asset value increases to an amount greater
than its net proceeds as stated in the prospectus.

    (2) Not applicable.

    (3) Not applicable.

    (4) Not applicable.

    (5) Registrant undertakes that, for the purpose of determining any liability
under the Securities Act, the information omitted from the form of prospectus
filed as part of the Registration Statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to Rule
497(h) will be deemed to be a part of the Registration Statement as of the time
it was declared effective.

    Registrant undertakes that, for the purpose of determining any liability
under the Securities Act, each post-effective amendment that contains a form of
prospectus will be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
will be deemed to be the initial bona fide offering thereof.

    (6) Registrant undertakes to send by first-class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, any Statement of Additional Information.

                                      C-4






<Page>
                                   SIGNATURES

    Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York and the State of New York, on
the 26th day of March, 2003.

                                          COHEN & STEERS REIT AND PREFERRED
                                          BALANCED INCOME FUND, INC.

                                          By:        /S/ ROBERT H. STEERS
                                              ..................................
                                                      ROBERT H. STEERS
                                                          CHAIRMAN

    Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.

<Table>
<Caption>
                SIGNATURE                                TITLE                          DATE
                ---------                                -----                          ----
<S>                                         <C>                                   <C>
             /s/ MARTIN COHEN               President, Treasurer and Director       March 26, 2003
 .........................................
               (MARTIN COHEN)

       By:     /s/ ROBERT H. STEERS         Director, Chairman and Secretary        March 26, 2003
 .........................................
                (ROBERT H. STEERS)
</Table>

                                      C-5

                         STATEMENT OF DIFFERENCES
                         ------------------------
The registered trademark symbol shall be expressed as................... 'r'
Characters normally expressed as superscript shall be preceded by....... 'pp'



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2A
<SEQUENCE>3
<FILENAME>ex99-2a.txt
<DESCRIPTION>EXHIBIT 2(A)
<TEXT>


<Page>


                            ARTICLES OF INCORPORATION

                                       OF

          COHEN & STEERS REIT AND PREFERRED BALANCED INCOME FUND, INC.

                  Cohen & Steers REIT and Preferred Balanced Income Fund, Inc.,
a Maryland corporation, hereby certifies to the State Department of Assessments
and Taxation that:

         FIRST:            (1) The name of the incorporator is Lawrence B.
         Stoller.

                           (2) The incorporator's post office address is 757
         Third Avenue, New York, New York 10017.

                           (3) The incorporator is over eighteen years of age.

                           (4) The incorporator is forming the corporation named
         in these Articles of Incorporation under the general laws of the State
         of Maryland.

         SECOND:  The name of the corporation (hereinafter called the
         "Corporation") is "Cohen & Steers REIT and Preferred Balanced Income
         Fund, Inc."

         THIRD:            (1) The purpose for which the Corporation is formed
         is to conduct, operate and carry on the business of a closed-end
         investment company registered under the Investment Company Act of 1940,
         as amended.

                           (2) The Corporation may engage in any other business
         and shall have all powers conferred upon or permitted to corporations
         by the Maryland General Corporation Law.






<Page>


         FOURTH:           The post office address of the principal office of
         the Corporation within the State of Maryland is 300 East Lombard
         Street, Baltimore, Maryland 21202 in care of The Corporation Trust
         Incorporated; and the resident agent of the Corporation in the State
         of Maryland is The Corporation Trust Incorporated, 300 East Lombard
         Street, Baltimore, Maryland 21202.

         FIFTH:            (1) The total number of shares of stock of all
         classes which the Corporation shall have authority to issue is one
         hundred million (100,000,000), all of which shall initially be Common
         Stock, having a par value of one-tenth of one cent ($.001) per share
         and an aggregate par value of one hundred thousand dollars ($100,000).
         Such shares and the holders thereof shall be subject to the following
         provisions:

                           (a) Shares of Common Stock shall be entitled to
         dividends or distributions, in cash, in property or in shares of stock
         of any class, as may be declared from time to time by the board of
         Directors, acting in its sole discretion, out of the assets lawfully
         available therefor.

                           (b) The Board of Directors is authorized, from time
         to time, to classify, reclassify, and designate as to series or class
         any unissued shares of stock of the Corporation, whether now or
         hereafter authorized, by setting, changing or eliminating the
         preferences, conversion or other rights, voting powers, restrictions,
         limitations as to dividends, qualifications or terms and conditions of
         or rights to require redemption of the stock, and otherwise in any
         manner and to the extent now or hereafter permitted by the Maryland
         General Corporation Law.




                                       2




<Page>

                           (c) The Corporation may issue shares of stock in
         fractional denominations to the same extent as its whole shares, and
         shares in fractional denominations shall be shares of stock having
         proportionately to the respective fractions represented thereby all the
         rights of whole shares, including without limitation, the right to
         vote, the right to receive dividends and distributions, and the right
         to participate upon the liquidation of the Corporation, but excluding
         any right to receive a stock certificate representing fractional
         shares.

                           (2) No stockholder shall be entitled to any
         preemptive or other right to purchase or subscribe for any shares of
         the Corporation's capital stock or any other security that the
         Corporation may issue or sell other than as the Board of Directors may
         establish.

                           (3) No stockholder shall be entitled to exercise the
         rights of an objecting stockholder under Subtitle 2 of Title 3 of the
         Maryland General Corporation Law, or under any successor statutory
         provisions with respect to objecting stockholders.

                           (4) All persons who shall acquire shares of capital
         stock in the Corporation shall acquire the same subject to the
         provisions of the Charter and By-Laws of the Corporation.

                           (5) Notwithstanding any provision of the Maryland
         General Corporation Law requiring any action to be taken or authorized
         by the affirmative vote of the holders of a greater proportion of the
         votes of all classes or of any class of stock of the Corporation,
         such action shall be effective and valid if taken


                                       3




<Page>



         or authorized by the affirmative vote of a majority of the total number
         of votes entitled to be cast thereon, except as otherwise provided in
         the Charter.

         SIXTH:             (1) The number of Directors of the Corporation
         shall initially be two. The number of Directors of the Corporation may
         be changed pursuant to the By-Laws of the Corporation but shall at no
         time be less than the minimum number required under the Maryland
         General Corporation Law nor more than twelve (12), except that the
         number of Directors of the Corporation may be increased to more than
         twelve (12) pursuant to Articles Supplementary filed by the
         Corporation with respect to any preferred stock issued by the
         Corporation in accordance with the Investment Company Act of 1940, as
         amended. The names of the initial Directors, each of whom shall serve
         until the first annual meeting of stockholders or until his successor
         is duly chosen and qualifies, are Robert H. Steers and Martin Cohen.

                            (2) Beginning with the first annual meeting of
         stockholders held after the initial public offering of the shares of
         the Corporation (the "first annual meeting") and if at such time, the
         number of Directors shall be three (3) or more, the Board of Directors
         of the Corporation shall be divided into three classes: Class I, Class
         II and Class III. At the first annual meeting, Directors of Class I
         shall be elected to the Board of Directors for a term expiring at the
         next succeeding annual meeting of stockholders, Directors of Class II
         shall be elected to the Board of Directors for a term expiring at the
         second succeeding annual meeting of stockholders and Directors of Class
         III shall be elected to the Board of Directors for a term expiring at
         the third succeeding annual meeting of


                                      4




<Page>

         stockholders, or thereafter in each case when their respective
         successors are elected and qualify. At each subsequent annual
         meeting of stockholders, the Directors chosen to succeed those
         whose terms are expiring shall be identified as being of the same class
         as the Directors whom they succeed and shall be elected for a term
         expiring at the time of the third succeeding annual meeting of
         stockholders subsequent to their election, or thereafter in each case
         when their respective successors are elected and qualify. The number of
         directorships shall be apportioned among the classes by the Board of
         Directors so as to maintain the number of Directors in each class as
         nearly equal as possible, but in no case shall a decrease in the number
         of Directors shorten the term of any incumbent Director.

                            (3) A Director of the Corporation may be removed
         from office only for cause and then only by vote of the holders of at
         least seventy-five percent (75%) of the votes entitled to be cast for
         the election of Directors.

         SEVENTH:           The following provisions are inserted for the
         purpose of defining, limiting and regulating the powers of the
         Corporation and of the Board of Directors and stockholders.

                            (1) In addition to its other powers explicitly or
         implicitly granted under these Articles of Incorporation, the By-Laws
         of the Corporation, by law or otherwise, the Board of Directors of the
         Corporation:

                            (a) is expressly and exclusively authorized to make,
         alter, amend or repeal the By-Laws of the Corporation;

                            (b) may from time to time determine whether, to what
         extent, at what times and places, and under what conditions and
         regulations the accounts


                                      5




<Page>

         and books of the Corporation, or any of them shall be open to
         inspection of the stockholders, and no stockholder shall have any right
         to inspect any account, book or document of the Corporation except as
         conferred by statute or as authorized by the Board of Directors of the
         Corporation;

                            (c) is empowered to authorize, without stockholder
         approval, the issuance and sale from time to time of shares of stock of
         the Corporation of any class, and securities convertible into stock of
         the Corporation of any class, whether now or hereafter authorized, for
         such consideration as the Board may deem advisable;

                            (d) is empowered, without the assent or vote of the
         stockholders, to authorize the Corporation to issue obligations of the
         Corporation, secured or unsecured, as the Board of Directors may
         determine, and to authorize and cause to be executed mortgages and
         liens upon the real or personal property of the Corporation.

                            (e) is authorized to establish the basis or method
         for determining the value of the assets and the amount of the
         liabilities of the Corporation and the net asset value of shares of any
         class of the Corporation's stock;

                            (f) is authorized to determine what accounting
         periods shall be used by the Corporation for any purpose; to set apart
         out of any funds of the Corporation reserved for such purposes as it
         shall determine and to abolish the same; to declare and pay any
         dividends and distributions in cash, securities or other property from
         any funds legally available therefor, at such intervals as it shall
         determine; to declare dividends or distributions by means of a formula
         or



                                       6




<Page>

         other method of determination, at meetings held less frequently than
         the frequency of the effectiveness of such declarations; to establish
         payment dates for dividends or any other distributions on any basis,
         including dates occurring less frequently than the effectiveness of
         declarations thereof, and to authorize dividends payable in one class
         of the Corporation's stock to the holders of another class of the
         Corporation's stock.

                            (2) Any determination made in good faith by or
         pursuant to the direction of the Board of Directors, as to the amount
         of the assets, debts, obligations, or liabilities of the Corporation,
         as to the amount of any reserves or charges set up and the propriety
         thereof, as to the time of or purpose for creating such reserves or
         charges, as to the use, alteration or cancellation of any reserves or
         charges (whether or not any obligation or liability for which the
         reserves or charges have been created has been paid or discharged, or
         is then or thereafter required to be paid or discharged), as to the
         value of or the method of valuing any investment owned or held by the
         Corporation, as to the number of shares of the Corporation outstanding,
         as to the estimated expense to the Corporation in connection with
         purchases of its shares, as to the ability to liquidate investments in
         orderly fashion, or as to any other matters relating to the issue,
         sale, redemption or other acquisition or disposition of investments or
         shares of the Corporation, shall be final and conclusive and shall be
         binding upon the Corporation and all holders of its shares, past,
         present, and future, and shares of the Corporation are issued and sold
         on the condition and understanding that any and all such determination
         shall be binding as aforesaid.




                                       7




<Page>

         EIGHTH:           (1) Notwithstanding any other provision of these
         Articles of Incorporation, the affirmative vote of the holders of
         (a) eighty percent (80%) of the votes entitled to be cast thereon by
         stockholders of the Corporation and (b) in the case of a Business
         Combination (as defined below), 66 2/3% of the votes entitled to be
         cast thereon by stockholders of the Corporation other than votes
         entitled to be cast thereon by an Interested Party (as defined below)
         who is (or whose Affiliate or Associate (each as defined below) is) a
         party to a Business Combination (as defined below) or by an Affiliate
         or Associate of the Interested Party, in addition to the affirmative
         vote of seventy-five percent (75%) of the entire Board of Directors,
         shall be required to advise, approve, adopt or authorize any of the
         following:

                            (i) a merger, consolidation or statutory share
         exchange of the Corporation with or into another person;

                            (ii) issuance or transfer by the Corporation (in one
         or a series of transactions in any 12 month period) of any securities
         of the Corporation to any person or entity for cash, securities or
         other property (or combination thereof) having an aggregate fair market
         value of $1,000,000 or more, excluding (a) issuances or transfers of
         debt securities of the Corporation, (b) sales of securities of the
         Corporation in connection with a public offering, (c) issuances of
         securities of the Corporation pursuant to a dividend reinvestment plan
         adopted by the Corporation, (d) issuances of securities of the
         Corporation upon the exercise of any stock subscription rights
         distributed by the Corporation and (e) portfolio transactions effected
         by the Corporation in the ordinary course of business;





                                       8




<Page>

                            (iii) sale, lease, exchange, mortgage, pledge,
         transfer or other disposition by the Corporation (in one or a series of
         transactions in any 12 month period) to or with any person or entity of
         any assets of the Corporation having an aggregate fair market value of
         $1,000,000 or more except for portfolio transactions (including pledges
         of portfolio securities in connection with borrowings) effected by the
         Corporation in the ordinary course of its business (transactions within
         clauses (i), (ii) and (iii) above being known individually as a
         "Business Combination");

                            (iv) the voluntary liquidation or dissolution of the
         Corporation, or an amendment to these Articles of Incorporation to
         terminate the Corporation's existence; or

                            (v) any stockholder proposal as to specific
         investment decisions made or to be made with respect to the
         Corporation's assets.

                            However, the stockholder vote described in Paragraph
         (1) of this Article EIGHTH will not be required with respect to the
         foregoing transactions (other than those set forth in (v) above) if
         they are approved by a vote of seventy-five percent (75%) of the
         Continuing Directors (as defined below). In that case, if Maryland law
         requires stockholder approval, the affirmative vote of a majority of
         the votes entitled to be cast shall be required, and if Maryland law
         does not require stockholder approval, no stockholder approval will be
         required.

                            (i) "Continuing Director" means any member of the
         Board of Directors of the Corporation who is not an Interested Party or
         an Affiliate of an Interested Party and has been a member of the Board
         of Directors for a period of




                                       9




<Page>

         at least 12 months, or has been a member of the Board of Directors
         since the Corporation's initial public offering of its Common Stock,
         or is a successor of a Continuing Director who is unaffiliated with an
         Interested Party and is recommended to succeed a Continuing Director
         by a majority of the Continuing Directors then on the Board of
         Directors.

                            (ii) "Interested Party" shall mean any person, other
         than an investment company advised by the Corporation's initial
         investment manager, or any of its Affiliates, that enters, or proposes
         to enter, into a Business Combination with the Corporation.

                            (iii) "Affiliate" and "Associate" shall have the
         meaning ascribed to each such respective term in Rule 12b-2 of the
         General Rules and Regulations under the Securities Exchange Act of
         1934, as amended.

                            (2) Continuing Directors of the Corporation acting
         by vote of at least 75% shall have the power and duty to determine, on
         the basis of information known to them after reasonable inquiry, all
         facts necessary to determine (a) whether a person is an Affiliate or
         Associate of another, and (b) whether the assets that are the subject
         of any Business Combination have, or the consideration to be received
         for the issuance or transfer of securities by the Corporation in any
         Business Combination has, an aggregate Fair Market Value of $1,000,000
         or more.

                            (3) Notwithstanding any other provision of these
         Articles of Incorporation, the affirmative vote of seventy-five percent
         (75%) of the entire Board of Directors shall be required to advise,
         approve, adopt or authorize the


                                       10




<Page>

         conversion of the Corporation from a "closed-end company" to an
         "open-end company" (as those terms are defined in the Investment
         Company Act of 1940, as amended), and any amendments to Article THIRD
         and otherwise to these Articles of Incorporation necessary to effect
         the conversion. Such conversion or any such amendment shall also
         require the approval of the holders of seventy-five percent (75%) of
         the votes entitled to be cast thereon by stockholders of the
         Corporation unless approved by a vote of seventy-five percent (75%) of
         the Continuing Directors (as defined above), in which event such
         conversion and amendment shall require the approval of the holders of a
         majority of the votes entitled to be cast thereon by stockholders of
         the Corporation.

         NINTH:            (1) To the full extent that limitations on
         the liability of directors and officers are permitted by the Maryland
         General Corporation Law, no director or officer of the Corporation
         shall have any liability to the Corporation or its stockholders for
         money damages. This limitation on liability applies to events occurring
         at the time a person serves as a director or officer of the Corporation
         whether or not that person is a director or officer at the time of any
         proceeding in which liability is asserted.

                            (2) The Corporation shall indemnify and advance
         expenses to its currently acting and its former directors to the full
         extent that indemnification of directors is permitted by the Maryland
         General Corporation Law. The Corporation shall indemnify and advance
         expenses to it officers to the same extent as its directors and may do
         so to such further extent as is consistent with law. The Board of
         Directors may by By-Law, resolution or agreement make




                                       11




<Page>

         further provision for indemnification of directors, officers,
         employees and agents to the full extent permitted by the Maryland
         General Corporation Law. This indemnification applies to events
         occurring at the time a person serves as a director or officer of the
         Corporation whether or not such person is a director or officer at the
         time of any proceeding in which liability is asserted.

                            (3) No provision of this Article shall be effective
         to protect or purport to protect any director or officer of the
         Corporation against any liability to the Corporation or its
         stockholders to which he would otherwise be subject by reason of
         willful misfeasance, bad faith, gross negligence or reckless disregard
         of the duties involved in the conduct of his office.

                            (4) References to the Maryland General Corporation
         Law in this Article are to that law as from time to time amended. No
         amendment to the Charter shall affect any right of any person under
         this Article based on any event, omission or proceeding prior to the
         amendment.

         TENTH:             (1) The Corporation reserves the right to amend,
         alter, change or repeal any provision contained in its Charter
         in the manner now or hereafter prescribed by the laws of the State of
         Maryland, including any amendment which alters the contract rights, as
         expressly set forth in the Charter, of any outstanding stock, and all
         rights conferred upon stockholders herein are granted subject to this
         reservation.

                            (2) In addition to the voting requirements imposed
         by law or by any other provision of these Articles of Incorporation,
         the provisions set forth in this Article TENTH, the provisions of
         Paragraphs (2) and (3) of Article SIXTH,





                                       12




<Page>

         the provisions of these Articles of Incorporation setting the maximum
         number of Directors at twelve (12) (except as otherwise provided in
         Paragraph (1) of Article SIXTH), the provisions of Article EIGHTH,
         and the provisions of Article NINTH, may not be amended, altered or
         repealed in any respect, nor may any provision inconsistent with this
         Article TENTH, the provisions of Paragraphs (2) and (3) of Article
         SIXTH, the provision setting the maximum number of Directors at twelve
         (12) (except as otherwise provided in Paragraph (1) of Article SIXTH)
         or the provisions of Article EIGHTH OR NINTH be adopted, unless such
         action is advised by seventy-five percent (75%) of the entire Board of
         Directors and approved by the affirmative vote of the holders of at
         least seventy-five percent (75%) of the votes entitled to be cast by
         stockholders of the Corporation.



                                       13




<Page>



         IN WITNESS WHEREOF, the undersigned, being the incorporator of the
Corporation, has adopted and signed these Articles of Incorporation and does
hereby acknowledge that the adoption and signing are his act.



                                           -------------------
                                           Lawrence B. Stoller

Dated:   March 24, 2003

                                     14



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2B
<SEQUENCE>4
<FILENAME>ex99-2b.txt
<DESCRIPTION>EXHIBIT 2(B)
<TEXT>


<Page>


                                     BY-LAWS

                                       OF

          COHEN & STEERS REIT AND PREFERRED BALANCED INCOME FUND, INC.

- -------------------------------------------------------------------------------

                                    ARTICLE I
                                     Offices

                  Section 1. Principal Office in Maryland.  The Corporation
shall have a principal office in the City of Baltimore, State of Maryland.

                  Section 2. Other Offices The Corporation may have offices also
at such other places within and without the State of Maryland as the Board of
Directors may from time to time determine or as the business of the Corporation
may require.
                                   ARTICLE II
                            Meetings of Stockholders

                  Section 1. Place of Meeting. Meetings of stockholders shall be
held at such place, either within the State of Maryland or at such other place
within or outside the United States, as shall be fixed from time to time by the
Board of Directors.

                  Section 2. Annual Meetings. The annual meeting of the
stockholders of the Corporation shall be held on a date not less than ninety
(90) days nor more than one hundred twenty (120) days following the end of the
Corporation's fiscal year fixed from time to time by the Board of Directors. An
annual meeting may be held at any place in or out of the State of Maryland and
at any time within the above-described period, each as may be determined by the
Board of Directors and designated in the notice of the meeting. Any business of
the Corporation may be transacted at an annual meeting without the purposes
having been specified in the notice unless otherwise provided by statute, the







<Page>

Corporation's Articles of Incorporation, as amended and supplemented from time
to time (the "Charter"), or these By-Laws.

                  Section 3. Notice of Annual Meeting. Written or printed notice
of the annual meeting, stating the place, date and hour thereof, shall be given
to each stockholder entitled to vote thereat and each other shareholder entitled
to notice thereof not less than ten nor more than ninety days prior to the date
designated for the meeting. Such notice shall be addressed to each stockholder
at his address appearing on the books of the Corporation or supplied by the
stockholder to the Corporation for the purpose of notice. Notice of any meeting
of stockholders shall be deemed waived by any stockholder who attends the
meeting in person or by proxy, or who before or after the meeting submits a
signed waiver of notice that is filed with the records of the meeting.

                  Section 4. Special Meetings. Special meetings of stockholders
may be called by the chairman, the president or by the Board of Directors and
shall be called by the secretary upon the written request of holders of not less
than a majority of the votes entitled to be cast at the meeting upon payment by
such stockholders to the Corporation of the reasonably estimated cost of
preparing and mailing a notice of the meeting (which estimated cost shall be
provided to such stockholders by the secretary of the Corporation). A written
request shall state the purpose or purposes of the proposed meeting.

                  Section 5. Notice of Special Meeting. Written or printed
notice of a special meeting of stockholders, stating the place, date, hour, and
purpose thereof, shall be given by the secretary to each stockholder entitled to
vote thereat and each other



                                       2




<Page>


 shareholder entitled to notice thereof not less than ten nor more than ninety
 days before the date fixed for the meeting.

                  Section 6. Business of Annual or Special Stockholder Meetings.
(a) At any annual or special meeting of the stockholders, only such business
shall be conducted, including, but not limited to, nominations of persons for
election to the Board of Directors, as shall have been properly brought before
the meeting. To be properly brought before an annual meeting, the business must
be (i) (A) specified in the notice of meeting (or any supplement thereto) given
by or at the direction of the Board of Directors (or any duly authorized
committee thereof), (B) otherwise properly brought before the meeting by or at
the direction of the Board of Directors (or any duly authorized committee
thereof), or (C) otherwise properly brought before the meeting by a stockholder
of the Corporation (1) who was a stockholder of record at the time of giving
notice provided for in Section 6(b) below and on the record date for the
determination of stockholders entitled to vote at such meeting, (2) who is
entitled to vote at the meeting and (3) who complied with the notice(s)
procedures set forth in Section 6(b) below, and (ii) a proper subject under
applicable law for stockholder action. To be properly brought before a special
meeting, the business must be (i) (A) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors (or
any duly authorized committee thereof), (B) otherwise properly brought before
the meeting by or at the direction of the Board of Directors (or any duly
authorized committee thereof), or (C) otherwise properly brought before the
meeting by a stockholder of the Corporation (1) who was a stockholder of record
at the time of giving notice provided for in Section 6(b) below and on the
record date for the determination of stockholders



                                       3




<Page>


entitled to vote at such meeting, (2) who is entitled to vote at the meeting and
(3) who complied with the notice(s) procedures set forth in Section 6(b) below,
and (ii) a proper subject under applicable law for stockholder action.

                           (b) For any stockholder proposal to be presented in
connection with an annual or special meeting of stockholders of the Corporation
(other than proposals made under Rule 14a-8 of the Securities Exchange Act of
1934, as amended (the "Exchange Act")), including any proposal relating to the
nomination of a director to be elected to the Board of Directors of the
Corporation, the stockholder must have given timely notice thereof in writing to
the secretary of the Corporation as provided in this Section 6. To be timely, a
stockholder's notice shall be delivered to the secretary at the principal
executive offices of the Corporation (a) in the case of an annual meeting, not
less than ninety (90) days nor more than one hundred twenty (120) days prior to
the first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is advanced by more than
thirty (30) days or delayed by more than sixty (60) days from such anniversary
date, notice by the stockholder to be timely must be so delivered not earlier
than the one hundred twentieth (120th) day prior to such annual meeting and not
later than the close of business on the later of the ninetieth (90th) day prior
to such annual meeting or the tenth day following the day on which public
announcement of the date of such meeting is first made; and (b) in the case of a
special meeting of stockholders called for the purpose of electing directors,
not later than the close of business on the tenth day following the day on which
notice of the date of the special meeting was mailed or public disclosure of the
date of the special meeting was made, whichever first occurs. Such stockholder's
notice shall set forth (a) as to each




                                       4




<Page>

person whom the stockholder proposes to nominate for election or re-election as
a director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Exchange Act and the
rules and regulations promulgated thereunder (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (b) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and of
the beneficial owner, if any, on whose behalf the proposal is made; and (c) as
to the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made, (i) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner, (ii) the class and number of shares of stock of the Corporation which are
owned beneficially and of record by such stockholder and such beneficial owner,
(iii) a description of all arrangements or understanding between such
stockholder and each proposed nominee or any other person or persons (including
their names) pursuant to which the nomination(s) are to be made by such
stockholder, (iv) a representation that such stockholder intends to appear in
person or by proxy at the meeting to nominate the persons named in its notice
and (v) any other information relating to such stockholder that would be
required to be made in connection with solicitations of proxies for election of
directors pursuant to Regulation 14A under the Exchange Act and the rules and
regulations promulgated thereunder.



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                            (c) Notwithstanding anything in the By-Laws
to the contrary, no business shall be conducted at any stockholder meeting
except in accordance with the procedures set forth in this Section 6 and no
person shall be eligible for election as a director of the Corporation unless
nominated in accordance with the procedures set forth in this Section 6. The
Chairman of the stockholder meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this Section 6, and if he should so
determine, he shall so declare to the meeting that any such business not
properly brought before the meeting shall not be considered or transacted. No
adjournment or postponement of a meeting of stockholders shall commence a new
period for the giving of notice of a stockholder proposal hereunder.

                            Section 7. Quorum. The holders of shares entitled to
cast a majority of the votes entitled to be cast thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. As provided in Section 8 of
Article II, a meeting of stockholders convened on the date for which it is
called may be adjourned from time to time without further notice to a date not
more than 120 days after the record date.

                            Section 8. Adjournment. Any meeting of the
stockholders convened on the date for which it was called may be adjourned from
time to time, without notice other than by announcement at the meeting at which
the adjournment was taken. In the absence of a quorum, the stockholders present
in person or by proxy, by majority vote of those present and without notice
other than by announcement at the meeting, may adjourn the meeting from time to
time. At any adjourned meeting at which a quorum shall be



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         present, any action may be taken that could have been taken at the
         meeting originally called. A meeting of the stockholders may not be
         adjourned without further notice to date more than 120 days after the
         original record date determined pursuant to Section 13 of Article II.

                            Section 9. Voting. When a quorum is present at any
         meeting, the affirmative vote of a majority of the votes cast by
         stockholders entitled to vote on the matter shall decide any question
         brought before such meeting (except that directors may be elected by
         the affirmative vote of a plurality of the votes cast), unless the
         question is one upon which by express provision of the Investment
         Company Act of 1940, as amended, or other statutes or rules or orders
         of the Securities and Exchange Commission or any successor thereto or
         of the Charter a different vote is required, in which case such express
         provision shall govern and control the decision of such question.

                            Section 10. Organization. At every meeting of the
         stockholders, the Chairman of the Board, or in his absence or inability
         to act, the president, or in his absence or inability to act, a vice
         president, or in the absence or inability to act of all the vice
         presidents, a chairman chosen by the stockholders, shall act as
         chairman of the meeting. The secretary, or in his or her absence or
         inability to act, a person appointed by the chairman of the meeting,
         shall act as secretary of the meeting and keep the minutes of the
         meeting.

                            Section 11. Order of Business. The order of business
         at all meetings of the stockholders shall be as determined by the
         chairman of the meeting.

                            Section 12. Proxies. Each stockholder shall at every
         meeting of stockholders be entitled to vote in person or by proxy
         appointed in such manner as may




                                       7




<Page>

         be permitted by Maryland law. No proxy shall be voted after eleven
         months from its date, unless otherwise provided in the proxy.
         Stockholders may authorize others to act as proxies by means of written
         proxies signed by the stockholder or by his authorized agent, facsimile
         signatures, electronic transmissions, internet transmissions,
         telephonic means, telegrams, datagrams, proxygrams and other reasonable
         means authorized or accepted by the Corporation, subject to the
         reasonable satisfaction of the Corporation that the stockholder has
         authorized the creation of the proxy. Every proxy shall be revocable at
         the pleasure of the stockholder providing it, except in those cases in
         which the proxy states that it is irrevocable and in which an
         irrevocable proxy is permitted by law.

                            Section 13. Record Date. In order that the
         Corporation may determine the stockholders entitled to notice of or to
         vote at any meeting of stockholders or any adjournment thereof, to
         express consent to corporate action in writing without a meeting, or to
         receive payment of any dividend or other distribution or allotment of
         any rights, or entitled to exercise any rights in respect of any
         change, conversion or exchange of stock or for the purpose of any other
         lawful action, the Board of Directors may fix, in advance, a record
         date which shall be not more than ninety days and, in the case of a
         meeting of stockholders, not less than ten days prior to the date on
         which the particular action requiring such determination of
         stockholders is to be taken. In lieu of fixing a record date, the Board
         of Directors may provide that the stock transfer books shall be closed
         for a stated period, but not to exceed, in any case, twenty days. If
         the stock transfer books are closed for the purpose of determining
         stockholders entitled to notice of or to vote at a meeting of
         stockholders, such books shall be closed for at least ten days
         immediately preceding such meeting. If no record date is fixed and the
         stock transfer books are not



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         closed for the determination of stockholders: (1) The record date for
         the determination of stockholders entitled to notice of, or to vote at,
         a meeting of stockholders shall be at the close of business of the day
         on which notice of the meeting stockholders is mailed or the day thirty
         days before the meeting, whichever is the closer date the meeting; and
         (2) The record date for the determination of stockholders entitled to
         receive payment of a dividend or an allotment of any rights shall be at
         the close of business on the day on which the resolution of the Board
         of Directors, declaring the dividend or allotment of rights, is
         adopted, provided that the payment or allotment date shall not be more
         than sixty days after the date of the adoption of such resolution. If a
         record date has been fixed for the determination of stockholders
         entitled to vote at a meeting, only the stockholders of record on the
         record date shall be entitled to vote at the meeting and such
         stockholders shall be entitled to vote at the meeting notwithstanding
         the subsequent transfer or redemption of the shares owned of record on
         such date. All persons who were holders of record of shares as of the
         record date of a meeting, and no others, shall be entitled to notice of
         and to vote at such meeting and any adjournment thereof.

                            Section 14. Inspectors of Election. The directors,
         in advance of any meeting, may, but need not, appoint one or more
         inspectors to act at the meeting or any adjournment thereof. If an
         inspector or inspectors are not appointed, the person presiding at the
         meeting may, but need not, appoint one or more inspectors. In case any
         person who may be appointed as an inspector fails to appear or act, the
         vacancy may be filled by appointment made by the directors in advance
         of the meeting or at the meeting by the person presiding thereat. Each
         inspector, if any, before entering upon the discharge of his duties,
         may be required to take and sign an oath faithfully to execute the
         duties of




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<Page>

         inspector at such meeting with strict impartiality and according to the
         best of his ability. The inspectors, if any, shall determine the number
         of shares outstanding and the voting power of each share, the shares
         represented at the meeting, the existence of a quorum, the validity and
         effect of proxies, and shall receive votes, ballots or consents, hear
         and determine all challenges and questions arising in connection with
         the right to vote, count and tabulate all votes, ballots or consents,
         determine the result, and do such acts as are proper to conduct the
         election or vote with fairness to all stockholders. On request of the
         person presiding at the meeting or any stockholder, the inspector or
         inspectors, if any, shall make a report in writing of any challenge,
         question or matter determined by him or them and execute a certificate
         of any fact found by him or them. No director or candidate for the
         office of director shall act as inspector of an election of directors.
         Inspectors need not be stockholders of the Corporation.

                            Section 15. Informal Action by Stockholders. Except
         to the extent prohibited by the Charter, the Investment Company Act of
         1940, as amended, or rules or orders of the Securities and Exchange
         Commission or any successor thereto, any action required or permitted
         to be taken at any meeting of stockholders may be taken without a
         meeting if a consent in writing, setting forth such action, is signed
         by all the stockholders entitled to vote on the subject matter thereof
         and any other stockholders entitled to notice of a meeting of
         stockholders (but not to vote thereat) have waived in writing any
         rights which they may have to dissent from such action, and such
         consent and waiver are filed with the records of the Corporation.


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<Page>


                                   ARTICLE III
                               Board of Directors

                            Section 1. Number of Directors. The number of
         directors constituting the entire Board of Directors (which initially
         was fixed at two in the Corporation's Charter) may be increased or
         decreased from time to time by the vote of a majority of the entire
         Board of Directors within the limits permitted by law but at no time
         may be more than twelve (except as provided in the Charter of the
         Corporation with respect to the rights of holders of preferred stock of
         the Corporation), but the tenure of office of a director in office at
         the time of any decrease in the number of directors shall not be
         affected as a result thereof. Beginning with the first annual meeting
         of stockholders of the Corporation held after the initial public
         offering of the Corporation's Common Stock, and if at such time, the
         number of directors shall be three (3) or more, (the "First Annual
         Meeting"), the Board of Directors of the Corporation shall be divided
         into three classes: Class I, Class II and Class III. At the First
         Annual Meeting, directors of Class I shall be elected to the Board of
         Directors for a term expiring at the next succeeding annual meeting of
         stockholders, directors of Class II shall be elected to the Board of
         Directors for a term expiring at the second succeeding annual meeting
         of stockholders and directors of Class III shall be elected to the
         Board of Directors for a term expiring at the third succeeding annual
         meeting of stockholders. At each subsequent annual meeting of
         stockholders, the directors chosen to succeed those whose terms are
         expiring shall be identified as being of the same class as the
         directors whom they succeed and shall be elected for a term expiring at
         the time of the third succeeding annual meeting of stockholders
         subsequent to





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         their election or thereafter in each case when their respective
         successors are elected and qualified. The directors shall be elected at
         the annual meeting of the stockholders, except as provided in Section 2
         of this Article III, and each director elected shall hold office for
         the term provided above and until his successor shall have been elected
         and shall have qualified, or until his death, or until he shall have
         resigned or have been removed as provided in these By-Laws, or as
         otherwise provided by statute or the Corporation's Charter. Any
         director may resign at any time upon written notice to the Corporation.
         Such vacancy shall be effective as of the date specified in the written
         notice, or if no date is specified, then immediately upon receipt by
         the Corporation. Unless specified in the written notice, acceptance of
         the resignation shall not be necessary for the resignation to be
         effective. Any vacancy created by an increase in directors may be
         filled in accordance with Section 2 of this Article III. No reduction
         in the number of directors shall have the effect of removing any
         director from office prior to the expiration of his term unless the
         director is specifically removed pursuant to Section 4 of this Article
         III at the time of the decrease. Directors need not be stockholders
         unless otherwise required by law.

                            Section 2. Vacancies and Newly-Created
         Directorships. Any vacancy occurring in the Board of Directors for any
         cause other than by reason of an increase in the number of directors
         may be filled by a majority of the remaining members of the Board of
         Directors whether or not sufficient to constitute a quorum. Any vacancy
         occurring by reason of an increase in the number of directors may be
         filled by a majority of the entire Board of Directors then in office.
         Notwithstanding the foregoing, if the stockholders of any class of the
         Corporation's capital stock are entitled separately to elect one or
         more directors, a majority of the remaining directors elected by that
         class or the



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         sole remaining director elected by that class may fill any vacancy
         among the number of directors elected by that class. A director
         elected by the Board of Directors to fill a vacancy shall be elected to
         hold office until the next annual meeting of stockholders and until his
         successor is elected and qualifies. Any director elected by the
         stockholders to fill a vacancy shall hold office for the balance of the
         term of the director he replaced.

                            Section 3. Powers. The business and affairs of the
         Corporation shall be managed by or under the direction of the Board of
         Directors, which may exercise all such powers of the Corporation and do
         all such lawful acts and things as are not by statute or by the Charter
         or by these By-Laws conferred upon or reserved to the stockholders.

                            Section 4. Removal of Directors. A director of the
         Corporation may be removed from office only for cause and then only by
         vote of the holders of at least seventy-five percent (75%) of the votes
         entitled to be cast for the election of directors.

                            Section 5. Meetings. The Board of Directors of the
         Corporation or any committee thereof may hold meetings, both regular
         and special, either within or without the State of Maryland. Regular
         meetings of the Board of Directors may be held without notice at such
         time and at such place as shall from time to time be determined by the
         Board of Directors. Special meetings of the Board of Directors may be
         called by the chairman, the president or by two or more directors.

                            Section 6. Quorum and Voting. A majority of the
         entire Board of Directors shall constitute a quorum for the transaction
         of business, and except as otherwise expressly required by statute, the
         Corporation's Charter or these By-Laws, the act of a majority of the
         directors present at any meeting at which a quorum is present shall be
         the act of the Board.



                                       13




<Page>

                            Section 7. Organization. The Chairman of the Board
         shall preside at each meeting of the Board. In the absence or inability
         of the Chairman of the Board to act, the president (if he is a
         director), or, in his absence or inability to act, another director
         chosen by a majority of the directors present, shall act as chairman of
         the meeting and preside at the meeting. The secretary (or, in his or
         her absence or inability to act, any person appointed by the chairman)
         shall act as secretary of the meeting and keep the minutes of the
         meeting.

                            Section 8. Committees. The Board of Directors may
         appoint from among its members an executive committee and other
         committees of the Board of Directors, each committee to be composed of
         one or more of the directors of the Corporation. The Board of Directors
         may delegate to such committees any of the powers of the Board of
         Directors except those that may not by law be delegated to a committee.
         Such committee or committees shall have the name or names as may be
         determined from time to time by resolution adopted by the Board of
         Directors. Unless the Board of Directors designates one or more
         directors as alternate members of any committee, who may replace an
         absent or disqualified member at any meeting of the committee, the
         members of any such committee present at any meeting and not
         disqualified from voting may, whether or not they constitute a quorum,
         appoint another member of the Board of Directors to act at the meeting
         in the place of any absent or disqualified member of such committee. At
         meetings of any such committee, a majority of the members or alternate
         members of such committee shall constitute a quorum for the transaction
         of business and the act of a majority of the members or alternate
         members present at any meeting at which a quorum is present shall be
         the act of the committee.





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<Page>

                            Section 9. Minutes of Committee Meetings. The
         committees shall keep regular minutes of their proceedings.

                            Section 10. Informal Action by Board of Directors
         and Committees. Any action required or permitted to be taken at any
         meeting of the Board of Directors or of any committee thereof may be
         taken without a meeting if a written consent thereto is signed by all
         members of the Board of Directors or of such committee, as the case may
         be, and such written consent is filed with the minutes of proceedings
         of the Board of Directors or committee, provided, however, that such
         written consent shall not constitute approval of any matter which
         pursuant to the Investment Company Act of 1940, as amended, and the
         rules thereunder requires the approval of directors by vote cast in
         person at a meeting.

                            Section 11. Meeting by Conference Telephone. The
         members of the Board of Directors or any committee thereof may
         participate in a meeting of the Board of Directors or committee by
         means of a conference telephone or similar communications equipment by
         means of which all persons participating in the meeting can hear each
         other at the same time and such participation shall constitute presence
         in person at such meeting, provided however, that such participation
         shall not constitute presence in person with respect to matters which
         pursuant to the Investment Company Act of 1940, as amended, and the
         rules thereunder require the approval of directors by vote cast in
         person at a meeting.

                            Section 12. Fees and Expenses. The directors may be
         paid their expenses of attendance at each meeting of the Board of
         Directors and may be paid a fixed sum for attendance at each meeting of
         the Board of Directors, a stated salary as director or such


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<Page>

         other compensation as the Board of Directors may approve. No such
         payment shall preclude any director from serving the Corporation in any
         other capacity and receiving compensation therefor. Members of special
         or standing committees may be allowed like reimbursement and
         compensation for attending committee meetings.

                                   ARTICLE IV
                                     Notices

                            Section 1. General. Notices to directors and
         stockholders mailed to them at their post office addresses appearing on
         the books of the Corporation shall be deemed to be given at the time
         when deposited in the United States mail.

                            Section 2. Waiver of Notice. Whenever any notice is
         required to be given under the provisions of the statutes, of the
         Charter or of these By-Laws, each person entitled to said notice waives
         notice if, before or after the meeting he signs a written waiver of
         notice and such waiver is filed with the records of the meeting.
         Attendance of a person at a meeting shall constitute a waiver of notice
         of such meeting except when the person attends a meeting for the
         express purpose of objecting, at the beginning of the meeting, to the
         transaction of any business because the meeting is not lawfully called
         or convened.

                                    ARTICLE V
                                    Officers

                            Section 1. General. The officers of the Corporation
         shall be chosen by the Board of Directors and shall be a chairman of
         the Board of Directors, a president, a secretary and a treasurer. The
         Board of Directors may choose also such vice presidents and additional
         officers or assistant officers as it may deem advisable. Any number of



                                       16




<Page>

         offices, except the offices of president and vice president and
         chairman and vice president, may be held by the same person. No officer
         shall execute, acknowledge or verify any instrument in more than one
         capacity if such instrument is required by law to be executed,
         acknowledged or verified by two or more officers.

                            Section 2. Other Officers and Agents. The Board of
         Directors may appoint such other officers and agents as it desires who
         shall hold their offices for such terms and shall exercise such powers
         and perform such duties as shall be determined from time to time by the
         Board of Directors.

                            Section 3. Tenure of Officers. The officers of the
         Corporation shall hold office at the pleasure of the Board of
         Directors. Each officer shall hold his office until his successor is
         elected and qualifies or until his earlier resignation or removal. Any
         officer may resign at any time upon written notice to the Corporation.
         Any resignation shall take effect at the time specified therein or, if
         the time when it shall become effective is not specified therein,
         immediately upon its receipt. The acceptance of a resignation shall not
         be necessary to make it effective unless otherwise stated in the
         resignation. Any officer elected or appointed by the Board of Directors
         may be removed, with or without cause at anytime, by the Board of
         Directors when, in its judgment, the best interests of the Corporation,
         will be served thereby. The Board may delegate the power of removal as
         to agents and employees not elected or appointed by the Board of
         Directors. Removal shall be without prejudice to the person's contract
         rights, if any, but the appointment of any person as an officer, agent
         or employee of the Corporation shall not of itself create contract
         rights. Any vacancy occurring in any office of the Corporation by
         death, resignation, removal, or otherwise shall be filled by the Board
         of Directors.





                                       17




<Page>

                            Section 4. Chairman of the Board of Directors. The
         Chairman of the Board of Directors shall preside at all meetings of the
         stockholders of the Board of Directors. Unless otherwise determined by
         the board of directors, he shall be the chief executive officer and
         shall have general and active management of the business of the
         corporation and shall see that all orders and resolutions of the board
         of directors are carried into effect. He shall be ex officio a member
         of all committees designated by the board of directors except as
         otherwise determined by the board of directors. He shall have authority
         to execute instruments and contracts on behalf of the corporation
         except where required by law to be otherwise signed and executed and
         except where the signing and execution thereof shall be expressly
         delegated by the board of directors to some other officer or agent of
         the corporation.

                            Section 5. President. The president shall act under
         the direction of the chairman and in the absence or disability of the
         chairman shall perform the duties and exercise the powers of the
         chairman. Unless otherwise determined by the Board of Directors, he
         shall be chief operating officer and shall perform such other duties
         and have such other powers as the chairman or the board of directors
         may from time to time prescribe. He shall have authority to execute
         instrument and contracts on behalf of the corporation except where
         required by law to be otherwise signed and except where the signing and
         execution thereof shall be expressly delegated by the Board of
         Directors to some other officer or agent of the Corporation.

                            Section 6. Vice Presidents. The vice presidents
         shall act under the direction of the chairman and in the absence or
         disability of the chairman shall perform the duties and exercise the
         powers of the president. They shall perform such other duties



                                       18




<Page>

         and have such other powers as the Chairman, the president or the Board
         of Directors may from time to time prescribe. The Board of Directors
         may designate one or more executive vice presidents or may otherwise
         specify the order of seniority of the vice presidents and, in that
         event, the duties and the powers of the president shall descend to the
         vice presidents in the specified order of seniority.

                            Section 7. Secretary. The secretary shall act under
         the direction of the chairman and the president. Subject to the
         direction of the chairman and the president he shall attend all
         meetings of the Board of Directors and all meetings of stockholders and
         record the proceedings in a book to be kept for that purpose and shall
         perform like duties for the committees designated by the Board of
         Directors when required. He shall give, or cause to be given, notice of
         all meetings of stockholders and special meetings of the Board of
         Directors, and shall perform such other duties as may be prescribed by
         the chairman or the Board of Directors. He shall keep in safe custody
         the seal of the Corporation and shall affix the seal or cause it to be
         affixed to any instrument requiring it.

                            Section 8. Assistant Secretaries. The assistant
         secretaries in the order of their seniority, unless otherwise
         determined by the chairman, the president or the Board of Directors,
         shall, in the absence or disability of the secretary, perform the
         duties and exercise the powers of the secretary. They shall perform
         such other duties and have such other powers as the chairman, the
         president or the Board of Directors may from time to time prescribe.


                            Section 9. Treasurer. The treasurer shall act under
         the direction of the chairman and the president. Subject to the
         direction of the chairman and the president he shall have the custody
         of the corporate funds and securities and shall keep full and





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<Page>

         accurate accounts of receipts and disbursements in books belonging to
         the Corporation and shall deposit all moneys and other valuable effects
         in the name and to the credit of the Corporation in such depositories
         as may be designated by the Board of Directors. He shall disburse the
         funds of the Corporation as may be ordered by the chairman, the
         president or the Board of Directors, taking proper vouchers for such
         disbursements, and shall render to the chairman, the president and the
         Board of Directors, at its regular meetings, or when the Board of
         Directors so requires, an account of all his transactions as treasurer
         and of the financial condition of the Corporation.

                            Section 10. Assistant Treasurers. The assistant
         treasurers in the order of their seniority, unless otherwise determined
         by the chairman, the president or the Board of Directors, shall, in the
         absence or disability of the treasurer, perform the duties and exercise
         the powers of the treasurer. They shall perform such other duties and
         have such other powers as the chairman, the president or the Board of
         Directors may from time to time prescribe.

                            Section 11. Delegation of Duties. In case of the
         absence of any officer of the Corporation, or for any other reason that
         the Board of Directors may deem sufficient, the Board may confer for
         the time being the powers or duties, or any of them, of such officer
         upon any other officer or upon any director.

                                   ARTICLE VI
                              Certificates of Stock

                            Section 1. General. Every holder of stock of the
         Corporation who has made full payment of the consideration for such
         stock shall be entitled upon request to have a certificate, signed by,
         or in the name of the Corporation by, the chairman, the




                                       20




<Page>

         president or a vice president and countersigned by the treasurer or an
         assistant treasurer or the secretary or an assistant secretary of the
         Corporation, certifying the number of whole shares of each class of
         stock owned by him in the Corporation.

                            Section 2. Fractional Share Interests. The
         Corporation may issue fractions of a share of stock. Fractional shares
         of stock shall have proportionately to the respective fractions
         represented thereby all the right of whole shares, including the right
         to vote, the right to receive dividends and distributions and the right
         to participate upon liquidation of the Corporation, excluding, however,
         the right to receive a stock certificate representing such fractional
         shares.

                            Section 3. Signatures on Certificates. Any of or all
         the signatures on a certificate may be a facsimile. In case any officer
         who has signed or whose facsimile signature has been placed upon a
         certificate shall cease to be such officer before such certificate is
         issued, it may be issued with the same effect as if he were such
         officer at the date of issue. The seal of the Corporation or a
         facsimile thereof may, but need not, be affixed to certificates of
         stock.

                            Section 4. Lost, Stolen or Destroyed Certificates.
         The Board of Directors may direct a new certificate or certificates to
         be issued in place of any certificate or certificates theretofore
         issued by the Corporation alleged to have been lost, stolen or
         destroyed, upon the making of any affidavit of that fact by the person
         claiming the certificate or certificates to be lost, stolen or
         destroyed. When authorizing such issue of a new certificate or
         certificates, the Board of Directors may, in its discretion and as a
         condition precedent to the issuance thereof, require the owner of such
         lost, stolen or destroyed certificate or certificates, or his legal
         representative, to give the Corporation a



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<Page>

         bond in such sum as it may direct as indemnity against any claim that
         may be made against the Corporation with respect to the certificate or
         certificates alleged to gave been lost, stolen or destroyed.

                            Section 5. Transfer of Shares. Upon request by the
         registered owner of shares, and if a certificate has been issued to
         represent such shares upon surrender to the Corporation or a transfer
         agent of the Corporation of a certificate for shares of stock duly
         endorsed or accompanied by proper evidence of succession, assignment or
         authority to transfer, it shall be the duty of the Corporation, if it
         is satisfied that all provisions of the Charter, of the By-Laws and of
         the law regarding the transfer of shares have been duly complied with,
         to record the transaction upon its books, issue a new certificate to
         the person entitled thereto upon request for such certificate, and
         cancel the old certificate, if any.

                            Section 6. Registered Owners. The Corporation shall
         be entitled to recognize the person registered on its books as the
         owner of shares to be the exclusive owner for all purposes including
         voting and dividends, and the Corporation shall not be bound to
         recognize any equitable or other claim to or interest in such share or
         shares on the part of any other person, whether or not it shall have
         express or other notice thereof, except as otherwise provided by the
         laws of Maryland.

                                  ARTICLE VII
                                 Miscellaneous

                            Section 1. Reserves. There may be set aside out of
         any funds of the Corporation available for dividends such sum or sums
         as the Board of Directors from time to time, in their absolute
         discretion, think proper as a reserve or reserves to meet


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<Page>


         contingencies, or such other purpose as the Board of Directors shall
         think conducive to the interest of the Corporation , and the Board of
         Directors may modify or abolish any such reserve.

                            Section 2. Dividends. Dividends upon the stock of
         the Corporation may, subject to the provisions of the Charter, the
         By-Laws and of applicable law, be declared by the Board of Directors at
         any time. Dividends may be paid in cash, in property or in shares of
         the Corporation's stock, subject to the provisions of the Charter, the
         By-Laws and of applicable law.

                            Section 3. Capital Gains Distributions. The amount
         in number of capital gains distributions paid to the stockholders
         during each fiscal year shall be determined by the Board of Directors.
         Each such payment shall be accompanied by a statement as to the source
         of such payment, to the extent required by law.

                            Section 4. Checks. All checks or demands for money
         and notes of the Corporation shall be signed by such officers or such
         other person or persons or as the Board of Directors may from time to
         time designate.

                            Section 5. Fiscal Year. The fiscal year of the
         Corporation shall be fixed by the resolution of the Board of
         Directors.

                            Section 6. Seal. The Corporate seal shall have
         inscribed thereon the names of the Corporation, the year of its
         organization and the words, "Corporate Seal, Maryland." The seal may be
         used by causing it or a facsimile thereof to be impressed or fixed or
         in another matter reproduced or by placing the word "(seal)" adjacent
         to the signature of the person authorized to sign the document on
         behalf of the Corporation.


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                                  ARTICLE VIII
                                 Indemnification

                            Section 1. Indemnification of Directors and
         Officers. The Corporation shall indemnify its directors to the fullest
         extent that indemnification of directors is permitted by the Maryland
         General Corporation Law. The Corporation shall indemnify its officers
         to the same extent as its directors and to such further extent as is
         consistent with law. The Corporation shall indemnify its directors and
         officers who while serving as directors or officers also serve at the
         request of the Corporation as a director, officer, partner, trustee,
         employee, agent or fiduciary of another corporation, partnership, joint
         venture, trust, other enterprise or employee benefit plan to the
         fullest extent consistent with law. The indemnification and other
         rights provided by this article shall continue as to a person who has
         ceased to be a director or officer and shall inure to the benefit of
         the heirs, executors and administrators of such a person. This Article
         shall not protect any such person against any liability to the
         Corporation or any stockholder thereof to which such person would
         otherwise be subject by reason of willful misfeasance, bad faith, gross
         negligence or reckless disregard of the duties involved in the conduct
         of his office ("disabling conduct").

                            Section 2. Advances. Any current or former director
         or officer of the Corporation seeking indemnification within the scope
         of this Article shall be entitled to advances from the Corporation for
         payment of the reasonable expenses incurred by him in connection with
         the matter as to which he is seeking indemnification without requiring
         a preliminary determination of ultimate entitlement to indemnification
         except as provided below, to the fullest extent permissible under the
         Maryland General Corporation Law.




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<Page>

         The person seeking indemnification shall provide to the Corporation a
         written affirmation of his good faith belief that the standard of
         conduct necessary for indemnification by the Corporation has been met
         and a written undertaking to repay any such advance if it should
         ultimately be determined that the standard of conduct has not been met.
         In addition, at least one of the following additional conditions shall
         be met: (a) the person seeking indemnification shall provide a security
         in form and amount acceptable to the Corporation for his undertaking;
         (b) the Corporation is insured against losses arising by reason of the
         advance; or (c) a majority of a quorum of directors of the Corporation
         who are neither "interested persons" as defined in Section 2(a)(19) of
         the Investment Company Act of 1940, as amended, nor parties to the
         proceeding ("disinterested non-party directors"), or independent legal
         counsel, in a written opinion, shall have determined, based on a review
         of facts readily available to the Corporation at the time the advance
         is proposed to be made, that there is reason to believe that the person
         seeking indemnification will ultimately be found to be entitled to
         indemnification.

                            Section 3. Procedure. At the request of any person
         claiming indemnification under this Article, the Board of Directors
         shall determine, or cause to be determined, in a manner consistent with
         the Maryland General Corporation Law, whether the standards required by
         this Article have been met. Indemnification shall be made only
         following: (a) a final decision on the merits by a court or other body
         before whom the proceeding was brought that the person to be
         indemnified was not liable by reason of disabling conduct, (b)
         dismissal of the proceeding against the person to be indemnified for
         insufficiency of evidence of any disabling conduct, or (c) in the
         absence of such a decision or dismissal, a reasonable determination,
         based upon a review of the facts, that




                                       25




<Page>

         the person to be indemnified was not liable by reason of disabling
         conduct by (i) the vote of a majority of a quorum of disinterested
         non-party directors or (ii) an independent legal counsel in a written
         opinion. Any determination pursuant to this Section 3 shall not prevent
         recovery from any person of any amount paid to be in accordance with
         this By-Law as indemnification if such person is subsequently
         adjudicated by a court of competent jurisdiction to be liable by reason
         of disabling conduct.

                            Section 4. Indemnification of Employees and Agents.
         Employees and agents who are not officers or directors of the
         Corporation may be indemnified, and reasonable expenses may be advanced
         to such employees or agents, as may be provided by action of the Board
         of Directors or by contract, subject to any limitations imposed by the
         Investment Company Act of 1940, as amended.

                            Section 5. Other Rights. The Board of Directors may
         make further provision consistent with law for indemnification and
         advance of expenses to directors, officers, employees and agents by
         resolution, agreement or otherwise. The indemnification provided by
         this Article shall not be deemed exclusive of any other right, with
         respect to indemnification or otherwise, to which those seeking
         indemnification may be entitled under any insurance or other agreement
         or resolution of stockholders or disinterested directors or otherwise.
         The Corporation shall not be liable for any payment under this By-Law
         in connection with a claim made by a director, officer, employee or
         agent to the extent such director, officer, employee or agent has
         otherwise actually received payment under an insurance policy,
         agreement, resolution or otherwise. The rights provided to any person
         by this Article shall be enforceable against the Corporation




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<Page>

         by such person who shall be presumed to have relied upon it in serving
         or continuing to serve as a director, officer, employee, or agent as
         provided above.

                            Section 6. Amendments. References in this Article
         are to the Maryland General Corporation Law and to the Investment
         Company Act of 1940, as amended. No amendment of these By-Laws shall
         effect any right of any person under this Article based on any event,
         omission or proceeding prior to the amendment.

                                   ARTICLE IX
                                   Amendments

                            The Board of Directors shall have the power to make,
         alter and repeal By-Laws of the Corporation, subject to the
         requirements of the Investment Company Act of 1940, as amended;
         provided, however, that no amendment of these By-Laws shall affect any
         right of any person under Article VIII hereof based on any event,
         omission or proceeding prior to the amendment. These By-Laws may not be
         amended by the stockholders of the Corporation.



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